YALE  READINGS  IN  INSURANCE 


LESTER  W.ZARTMAN 


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FIRE  INSURANCE 


UNIVERSITY  OF  CALIFORNIA 
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YALE  READINGS   IN   INSURANCE 


FIRE  AND   MISCELLANEOUS 


YALE  READINGS  IN  INSURANCE 


FIRE    INSURANCE 


EDITED    BY 

LESTER    W.  ZARTMAN,  Ph.D. 

ASSISTANT  PROFESSOR  OF  POLITICAL    ECONOMY,  YALE    UNIVERSITY 


NEW  HAVEN,  CONNECTICUT 

YALE    UNIVERSITY   PRESS 

LONDON 

HENRY    FROWDE 

OXFORD  UNIVERSITY  PRESS 

1909 


Copyright,  1909,  by 
Yale  University  Press 


Entered  at  Stationers'  Hall,  London 


Printed  in  the  United  Stales 


HC3t 


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PREFACE 

The  "Yale  Lectures  on  Fire  and  Miscellaneous  Insur^' 
ance"  appeared  five  years  ago.  Although  a  considerable 
edition  was  printed,  the  unexpectedly  large  demand  soon 
exhausted  it,  and  as  the  plates  were  destroyed,  for  two 
years  the  lectures  have  been  out  of  print. 

It  seems  desirable  that  either  a  new  edition  of  the  lec- 
tures should  be  printed,  or  that  something  new  should  be 
published  in  their  place.  The  latter  alternative  has  been 
chosen,  and  instead  of  simply  reprinting  the  old  lectures, 
the  plan  has  been  adopted  of  selecting  special  readings, 
partly  from  the  "Yale  Lectures,"  partly  from  other 
sources.  This  plan  was  preferred  because  the  literature 
of  fire  and  miscellaneous  forms  of  insurance  has  been  devel- 
I  oping  so  rapidly  that  a  much  more  comprehensive  text- 
'V  book  can  now  be  prepared  than  was  possible  a  few  years 
^  ago.  By  not  confining  this  volume  to  a  reprint  of  the  old 
lectures,  it  has  been  possible  to  take  advantage  of  the 
advance  which  has  taken  place  in  this  literature.  Only 
seven  of  the  lectures  in  the  old  volume  are  reprinted,  and 
all  but  one  of  these  have  been  extensively  changed.  Some 
of  the  matter  now  published  has  never  appeared  before, 
and  much  of  the  remainder  has  been  revised. 

The  major  part  of  this  volume  is  devoted  to  the  subject 
of  fire  insurance.  The  general  principles  involved  in 
fire  insurance  are  typical  of  those  found  in  all  forms  of 
insurance  other  than  life  insurance.    The  miscellaneous 

V 

7 


vi  PREFACE 

forms  of  insurance,  such  as  marine,  steam  boiler,  employers' 
liability,  and  workingmen's  insurance  are  discussed  to 
the  extent  that  each  introduces  new  methods  and  new 
principles  into  the  business.  In  selecting  these  readings, 
the  aim  has  been  to  avoid  those  authors  who  treat  the 
subject  in  technical  language,  as  well  as  those  who  make 
the  subject  more  simple  than  it  really  is,  and  thus  conceal 
its  real  problems.  The  broad  selection  of  material  would 
not  have  been  possible  without  the  cooperation  of  others. 
It  is  a  pleasure  to  record  the  fine  spirit  of  publishers  in 
permitting  reprints  from  copyrighted  books,  and  the  will- 
ingness of  authors  to  revise  articles  where  changed  condi- 
tions made  revision  desirable. 

Lester  W.  Zartman. 

New  Haven, 

August,  1909. 


CONTENTS 

CHAPTER  I 
History  of  Fire  Insurance  in  Europe 1 

CHAPTER   II 
History  of  Fire  insurance  in  the  United  States    ...       12 

CHAPTER   III 
Function  of  Fire  Insurance 41 

CHAPTER   IV 
Organization  of  Companies 6? 

CHAPTER  V 
Rates  and  Hazards 82 

CHAPTER   VI 
Fire-Rating 115 

CHAPTER   VII 
Scientific  Fire-Rating 136 

CHAPTER   VIII 
Standard  Fire  Insurance  Policy 156 

CHAPTER  IX 
The  Nature  of  the  Policy  Contracts 164 

CHAPTER   X 
The  Co-Insurance  Clause         188 

CHAPTER   XI 
Discrimination  and  Cooperation  in  Fire  Insurance  Rating     199 

CHAPTER   XII 

Valued-Policy  Laws 224 

vii 


viii  CONTENTS 

CHAPTER   XIII 
The  Conflagration  Hazard 241 

CHAPTER   XIV 
Fire  Insur.vnce  Engineering 250 

CHAPTER   XV 
Fire  Protection  with  Automatic  Sprinklers 263 

CHAPTER   XVI 
Factory  Mutual  Fire  Insurance 271 

CHAPTER   XVII 
History  of  Marine  Insurance 294 

CHAPTER   XVIII 
The  Policy  Contract  in  Marine  Insurance 332 

CHAPTER   XIX 
Steam  Boiler  Insurance 352 

CHAPTER   XX 
Employers'  Liability  Insurance 369 

CHAPTER   XXI 
Government  Insurance 392 

CHAPTER   XXII 
Operation  of  Compulsory  Workingmen's  Insurance  in  Ger- 
many       413 

Index 437 


YALE  READINGS  IN  INSURANCE 
CHAPTER  I 

HISTORY   OF  FIRE   INSURANCE   IN   EUROPE  ^ 

Fire  insurance  as  now  commonly  practised  is  usually 
considered  to  have  begun  after  the  great  conflagration  of 
London  in  1666.  While  marine  insurance  —  the  oldest 
form  of  insurance  in  existence  —  had  been  steadily  develop- 
ing and  extending  with  the  great  expansion  of  trade  and 
navigation  which  followed  the  discovery  of  the  New  World, 
and  although  merchants  and  ship  owners  from  very 
remote  times  clearly  foresaw  and  provided  against  the 
perils  of  navigation,  very  little  specific  attempt  was  made 
by  property  owners  to  secure  indemnity  for  loss  caused 
by  fire  prior  to  the  date  above  mentioned. 

It  is  true  that  some  forms  of  provision  for  the  aid  of 
those  sufTering  from  loss  by  fire  and  other  calamitous 
causes  apparently  existed  in  very  remote  times,  as  the 
following  quotation  will  evidence : 

"The  earliest  application  of  fire  insurance  known  to  us 
was  in  connection  with  communes  of  towns  and  districts. 
These  communes  flourished  in  Assyria  and  the  East  more 
than  2500  years  ago.  Judges,  priests,  and  magistrates 
were  appoineed  for  each  town  and  district  with  power  to 
levy  contributions  from  each  member  of  the  commune  to 
provide  a  fund  against  sudden  calamities  such  as  drought 
and  fire.    If  the  judges  were  satisfied  that  the  fire  was 

>  By  Richard  M.  Bisscll,  Vice-President  of  the  Hartford  Fire  Insur- 
ance Company,  Hartford.  Reprinted  from  pages  13-24  of  the  "  Yale 
Lectures  on  Insurance,  Fire  and  Miscellaneous." 

1 


2  YALE  READINGS  IN  INSURANCE 

accidental  they  empowered  the  magistrates  to  assess  the 
members  of  the  commune  either  in  kind  or  in  money,  and 
in  the  event  of  any  member  being  unable  through  poverty 
to  meet  his  share  of  the  contribution,  the  deficiency  was 
made  up  from  the  common  fund.  These  communes  still 
exist  in  a  modified  form  in  China." 

As  early  as  1240  a.d.  the  laws  of  Count  Thomas  of 
Flanders  provided  that  the  members  of  a  community  as 
a  whole  should  make  good  a  loss  which  fire  might  cause 
to  an  individual,  unless  the  incendiary  who  caused  the  fire 
could  be  discovered,  in  which  case  the  loss  was  to  be  made 
good  from  his  property  and  he  was  to  be  banished. 

It  will  be  noted  that  the  plans  outlined  above  contem- 
plated an  assessment  by  the  state  and  that  all  property 
owners  were  protected.  We  may  discover  here,  therefore, 
the  beginning  of  state  fire  insurance,  which  will  be  later 
more  fully  described  and  which  continues  in  Germany  and 
elsewhere  to  this  day  on  a  large  scale. 

Another  method  for  protection  and  security  against 
loss  by  fire,  water,  robbery,  or  other  calamities,  arose 
during  the  Middle  Ages  in  connection  with  the  various 
Anglo-Saxon  and  German  guilds,  the  members  of  which 
made  regular  contributions  toward  a  common  relief  fund. 

In  1609  a  plan  was  suggested  by  one  of  his  subjects  to 
Count  Von  Oldenberg,  wherein  it  was  proposed  that  he 
individually  should  consent  to  insure  those  of  his  sub- 
jects, who  might  so  desire,  against  the  loss  of  their  houses 
by  fire  upon  an  annual  payment  to  him  of  a  fee  or  premium 
of  one  dollar  for  every  one  hundred  dollars  of  valuation. 
This  suggestion  was  declined  by  the  Count,  though  not 
without  some  hesitation,  and,  though  he  suggested  that 
such  a  plan  might  well  be  undertaken  by  a  company  of 
private  individuals,  no  action  on  his  suggestion  seems  to 
have  been  taken.  This,  so  far  as  I  have  been  able  to 
discover,  was  the  first  suggestion  ever  made  looking 
toward  the  formation  of  a  company  or  association  for  fire 
insurance  purposes  only. 


FIRE  INSURANCE  IN  EUROPE  3 

In  England  various  fire  insurance  schemes  were  pro- 
posed in  1635, 1638,  and  1660,  but  for  one  reason  or  another 
—  largely  owing  to  the  great  Civil  War  —  none  of  them 
was  fully  organized,  and  as  late  as  1667  there  is  evidence 
that  fire  insurance  as  we  know  it  did  not  exist. 

In  1666  came  the  great  fire  of  London,  which  burned 
for  four  days  and  nights  and  spread  over  436  acres  of 
territory.  This  was  an  alarming  and  appalling  calamity. 
Over  85  per  cent,  of  the  buildings  in  London  were  destroyed, 
while  the  property  loss  is  estimated  to  have  been  about 
ten  million  pounds,  —  a  sum  which  has  been  calculated 
to  equal  over  three  hundred  million  dollars  at  present 
values.  In  the  absence  of  insurance  this  was  a  blow  from 
which  London  was  slow  to  recover,  as  is  shown  by  the  fact 
that  in  1673,  seven  years  later,  about  one  thousand  build- 
ings were  yet  to  be  replaced.  Relatively,  this  London  fire 
was  the  greatest  in  the  history  of  the  world,  and  the  date 
of  it  —  September  2  —  was  observed  as  a  Fast  Day  for 
more  than  one  hundred  years  thereafter. 

Immediately  after  the  fire  various  plans  for  the  pro- 
tection of  individuals  against  loss  by  fire  began  to  be 
devised.  In  1667  the  first  regular  system  for  insuring 
buildings  against  fire  began.  In  that  year,  one  Nicholas 
Barbon  opened  an  office  where  he  individually  proposed 
to  insure  houses  and  buildings.  A  few  years  later,  in  1680, 
after  having  had  some  success,  he  formed  a  partnership 
known  as  ''The  Fire  Office."  This  company,  for  a  given 
consideration,  engaged  to  pay  the  assured  the  amount  of 
indemnity  declared  in  the  policy,  or  contract,  should  his 
house  or  building  be  destroyed  by  fire,  or  to  repair  it  should 
it  be  only  "damnified" — i.e.,  damaged.  No  liability,  it 
will  be  noted,  rested  upon  the  assured  beyond  the  payment 
of  the  premium. 

In  1681,  a  few  years  after  this  first  company  was  estab- 
lished, an  attempt  was  made  by  the  city  of  London  to 
establish  an  insin-ance  account,  or  business,  and  funds  and 
property  were  put  aside  and  dedicated  for  that  purpose. 


4  YALE  READINGS  IN  INSURANCE 

Houses  were  insured  for  any  term  up  to  one  hundred  years. 
But  the  enterprise  did  not  prosper  and  was  abandoned  in 
1683. 

Then  followed,  in  the  same  year,  what  was  called  the 
"Friendly  Society."  This  concern,  which  had  an  exist- 
ence of  nearly  one  hundred  years,  conducted  its  business 
upon  an  entirely  different  plan,  as  follows:  First,  the 
assured  paid  yearly  a  small  sum,  varying  according  as  the 
building  to  be  insured  was  brick  or  frame.  This  charge 
was  to  cover  the  expenses  and,  we  may  presume,  the  profits 
of  those  who  operated  the  company.  Second,  the  assured 
deposited  with  the  company  a  sum  equal  to  five  annual 
payments  as  a  guarantee  that  future  payments  and  assess- 
ments would  be  met  as  required.  This  money  could  be 
appropriated  by  the  company  if  the  assured  failed  to  keep 
up  his  payments.  Third,  the  assured  signed  an  agreement 
to  contribute  his  share  toward  the  payment  of  any  and 
every  loss  which  the  company  might  sustain  up  to  an 
amount  not  exceeding  thirty  shillings  for  every  one  hun- 
dred pounds  of  insurance  carried  by  him.  It  will  be  seen 
that  all  losses  were  to  be  paid  from  the  contribution  of  the 
assured,  upon  whom,  also,  rested  all  liability  and  for  whom 
the  operators  of  the  company  or  the  "undertakers,"  as 
they  were  termed,  acted  only  as  collectors  and  distributors. 

This  was  a  form  of  mutual  insurance,  as  it  is  now  called; 
that  is  to  say,  insurance  where  the  policy-holders  are 
directly  liable  for  one  another's  losses.  This  company 
was  also  fairly  successful. 

Another  purely  mutual  company  was  organized  in  1696. 
This  company  proposed  a  deposit  to  be  paid  back,  less 
expenses,  when  contracts  should  terminate;  also  that 
profits  from  interest  on  invested  funds  over  and  above 
losses  and  expenses  should  be  divided  among  the  members 
or  policy-holders,  and  that  each  year  a  rate  of  assessment 
should  be  declared  by  the  directors,  according  to  which 
levies  should  be  made  on  the  policy-holders  for  payment 
of  losses  or  for  the  distribution  of  profits  to  them.     It 


FIRE  INSURANCE  IN  EUROPE  5 

was  assumed  that  the  interest  or  earnings  from  the  accu- 
mulated deposits  would  pay  all  losses,  and  this  seems  to 
have  been  the  case,  for  the  company  prospered  and  grew 
and  is  in  existence  to-day,  having  greatly  developed  in 
size  and  scope,  being  the  oldest  insurance  company  in 
existence.  Its  operations  are  limited  to  London  and  its 
suburbs.  The  original  title  of  this  company  was  "Con- 
tributors for  Insuring  Houses,  Chambers  or  Rooms  from 
Loss  by  Fire  by  Amicable  Contribution."  This  was  after- 
ward changed  to  "Amicable  Contributionship,"  and  in 
1776  the  name  of  "Hand  in  Hand"  —  taken  from  an  em- 
blem used  by  the  company  in  marking  and  designating 
buildings  which  it  insured  —  was  adopted. 

The  companies  heretofore  mentioned  all  confined  their 
operations  to  buildings  and  mostly  to  dwellings  only,  but 
the  need  for  insurance  upon  goods  and  stocks  of  merchan- 
dise was  very  great.  About  1706,  one  Charles  Povey 
opened  an  office  for  insuring  such  property  in  London. 
He  was  without  backing  or  support  of  any  kind  and  fur- 
nished merely  his  promise  to  pay  in  event  of  loss.  This 
venture  was  apparently  greeted  with  ridicule  and  the  pro- 
posal to  insure  personal  property  seems  to  have  been 
commonly  considered  impractical.  Nevertheless  Povey  per- 
sisted and  soon  began  another  enterprise  designed  to  insure 
personal  property  throughout  Great  Britain  and  Ireland, 
but  finding  his  first  venture  unprofitable  devised  the  scheme 
(which  would  seem  to  be  quite  in  accord  with  some  very 
modern  methods  of  corporate  finance),  of  organizing  a 
third  institution  to  take  over  the  other  two.  This  was 
accomplished.  The  new  concern  was  at  first  called  the 
"London  Insurers,"  but  almost  immediately  after  its 
formal  inaugury  in  1710  it  adopted  the  name  of  the  Sun 
Fire  Office,  and  under  this  name  began  its  successful  career 
which  still  endures,  making  that  office  the  oldest  non- 
mutual  company  in  existence  as  well  as  the  first  company 
which  ever  undertook  the  insurance  of  movables  or  per- 
sonal property.     It  has  continued  to  be  a  partnership,  i.e., 


6  YALE  READINGS   IN   INSURANCE 

not  a  corporation,  and  is  almost  unique  among  insurance 
companies  in  that  respect.  The  first  contracts  of  the  Sun 
provided  for  payment  of  losses  out  of  a  reserve  to  be  made 
up  of  one-half  the  premiums  paid,  the  liability  of  the  com- 
pany ceasing  when  that  reserve  should  be  exhausted. 
Later  the  company,  doubtless  under  stress  of  competition, 
made  its  promise  to  pay  absolute,  and  in  1726  a  capital 
fund  of  48,000  pounds  was  created  as  additional  security 
for  policy-holders. 

Another  curious  feature  of  the  contracts  made  by  this 
first  company  doing  general  business  was  the  proviso  that 
in  case  of  loss,  5  per  cent,  should  be  deducted  from  claims 
for  defraying  the  expenses  of  the  company's  officers  in 
investigating  and  settling  the  loss.  This  was  reduced  to 
3  per  cent,  in  1716,  and  abandoned  altogether  not  later 
than  1794.  This  feature  seems  to  have  been  quite  com- 
mon among  insurance  companies  during  the  early  history 
of  the  business,  but  was  too  obviously  open  to  objection 
and  criticism  to  endure  after  serious  competition  arose. 

Between  1710  and  1720  numerous  insurance  schemes 
were  launched,  modeled  after  one  or  the  other  of  those 
described  above.  Some  succeeded,  more  failed  or  were 
wound  up.  In  1720  the  first  chartered  companies  or  cor- 
porations made  their  appearance.  In  that  year  two  com- 
panies —  the  Royal  Exchange  Assurance  Company  and 
the  London  Assurance  Corporation  —  were  granted  char- 
ters, first  to  do  a  marine  insurance  business,  and  in  the 
following  year  to  transact  also  fire  and  life  insurance  busi- 
ness. This  date  then,  1720,  marks  the  advent  of  modern 
stock  companies  in  fire  insurance.  One  of  the  first 
announcements,  or  "broadsides"  (as  such  notices  were  then 
styled)  of  the  Royal  Exchange  Assurance  contains  the 
following  as  one  of  the  arguments  which  should  persuade 
insurers  to  patronize  it  rather  than  the  mutual  associations 
or  contributionships  theretofore  doing  most  of  the  busi- 
ness: 

"For  the  security  of  all  persons  insured  by  this  Cor- 


FIRE  INSURANCE  IN  EUROPE  7 

poration,  their  capital  stock  or  fund  is  by  their  charter 
established  and  made  liable  and  shall  always  be  ready 
to  pay  and  make  good  to  the  assured  the  amount  of  all 
losses  by  fire." 

Later  in  the  same  paper  appeared  the  following: 

"And  whereas  persons  assured  by  other  societies  not 
incorporated,  are  subject  to  calls  in  case  of  a  loss  or  a 
deduction  out  of  the  money  due  to  the  sufferer,  those  that 
are  assured  by  this  Corporation  are  not  liable  to  any  calls 
(i.e.,  assessments),  or  deductions  whatsoever." 

These  considerations  —  namely,  freedom  from  all  per- 
sonal liability  on  the  part  of  the  assured  beyond  payment 
of  a  fixed  premimn  and  the  fact  that  in  the  case  of  stock 
companies  their  entire  capital  stock  and  accumulated 
funds  are  pledged  to  the  payment  of  losses  —  have  no 
doubt  chiefly  caused  the  commercial  world  to  favor  stock 
companies  or  corporations  up  to  this  date,  when  such  com- 
panies do  a  very  large  proportion  of  all  the  fire  insurance 
business. 

This  may  be  said  to  bring  the  history  of  fire  insurance 
in  Great  Britain  down  to  modern  times.  During  the  last 
three-quarters  of  the  eighteenth  century  fire  insurance 
companies,  both  mutual  and  stock,  but  chiefly  the  latter, 
were  organized  in  very  considerable  numbers  and  for  the 
most  part  copied  the  methods,  contracts,  and  practices 
of  the  earlier  companies.  Many  of  these  companies  still 
survive;  indeed,  some  of  the  largest  English  companies 
in  existence  date  from  that  period. 

The  early  histories  of  these  first  ventures  in  fire  insurance 
contain  much  curious  and  interesting  matter,  but  time 
and  space  do  not  permit  a  study  of  their  plans  and  methods. 
One  feature  of  their  early  operations,  however,  has  de- 
veloped to  such  great  proportions  and  has  become  of  such 
great  importance  as  to  demand  mention  here,  namely,  the 
protection  of  property  against  fire.  It  was  a  natural  and 
immediate  outcome  of  the  first  attempt  at  fire  insurance 
by  Nicholas  Barbon  that  his  interest  in  fires  antl  their  pre- 


8  YALE  READINGS  IN  INSUR.AJ^CE 

vention  should  be  greatly  augumented.  Accordingly  his 
and  the  other  early  offices  devised  metal  house  plates  to 
be  securely  fastened  to  those  buildings  which  might  be  cov- 
ered by  their  policies,  and  then  hired  men  and  provided 
some  simple  apparatus  for  extinguishing  the  fires  which 
might  arise  in  or  near  the  buildings  so  marked.  These 
house  plates  were  also  considered  as  a  mark  of  acceptance 
and  assumption  of  liability  by  the  companies.  Some 
offices  even  stipulated  that  liability  should  not  begin  until 
their  plate  had  been  affixed  to  the  building  which  the  policy 
was  to  cover.  This  it  was  thought  tended  to  hinder  fraud 
and  prevent  disputes.  Moreover,  because  they  brought  a 
building  under  the  protection  of  the  company's  firemen 
and  because  they  evidenced  to  the  public  the  fact  that  the 
property  owner  would  not  be  ruined  by  fire,  these  plates 
were  esteemed  as  desirable  and  valuable  by  policy-holders. 
They  became  in  fact  a  sort  of  basis  of  credit,  and  the 
custom  of  using  these  plates  endured,  especially  in  smaller 
places,  long  after  their  original  use  had  disappeared.  In 
fact,  such  plates  are  used  in  some  foreign  countries  to- 
day. In  America  their  use  was  very  common  until  about 
twenty-five  years  ago;  they  may  still  be  seen  over  the 
door  of  many  New  England  homes  and  are  not  yet  entirely 
obsolete  among  the  farmers  in  some  sections  of  the 
country. 

The  ordinary  method  of  preventing  the  spread  of  fire 
at  that  period  seems  to  have  been  by  blowing  up  buildings 
by  gunpowder,  and  this  work  was  commonly  done  by 
the  artihery,  or  Royal  Gunners.  The  early  insurance 
companies  used  also  bucket  brigades  and  hand-pumping 
engines.  Each  company  had  its  own  liveried  firemen, 
who  were  expected  to  guard  its  interests.  Later  some  of 
the  companies  organized  corps  of  watchmen  and  patrol- 
men who  should  discover  fires  in  their  incipiency,  give 
the  alarm  and  summon  the  firemen  of  the  company  for 
whom  they  worked.  Still  later,  when  the  practice  of 
insuring  personal  property  began,  it  was  found  advisable 


FIRE  INSURANCE  IN  EUROPE  9 

by  the  Sun  office  —  the  first,  it  will  be  remembered,  to 
transact  that  class  of  business  —  to  provide  a  body  of 
men  for  the  purpose  of  removing  insured  goods  from  burn- 
ing buildings  and  for  protecting  them  when  so  removed 
from  thieves  and  pilferers.  As  companies  multiplied,  so  did 
their  private  fire  and  salvage  corps  increase  in  number, 
until  in  1808  fifty  fire  engines  were  kept  up  by  the  com- 
panies in  London  alone.  In  1825  a  number  of  these  com- 
panies consolidated  their  fire  brigades.  In  1833  all  were 
united,  but  not  till  1866  was  the  establishment  turned 
over  to  the  city.  It  seems  very  strange  that  private 
corporations  should  have  so  long  been  allowed  to  con- 
trol and  direct  this  important  branch  of  civic  adminis- 
tration. 

Inasmuch  as  modern  fire  insurance  had  its  genesis  and 
early  development  in  Great  Britain,  whence  also  American 
ideas  and  practices  were  derived,  we  have  devoted  most  of 
our  limited  time  to  the  early  history  of  the  business  there 
and  can  give  but  slight  and  incidental  attention  to  the 
subject  in  other  foreign  countries.  This  course  has  seemed 
to  be  proper,  not  only  for  the  reason  just  mentioned,  but 
because  English  fire  insurance  companies  have  developed 
more  rapidly  and,  following  the  track  of  English  ships 
and  commerce,  have  carried  their  operations  throughout 
the  world  to  a  far  greater  extent  than  the  companies  of 
any  other  country.  There  is  no  quarter  of  the  globe 
where  fire  insurance  may  not  be  obtained  from  English 
offices.  The  insurance  companies  of  other  countries  for 
the  most  part  confine  their  operations  to  their  own  coun- 
try, with  the  exception  perhaps  of  Germany,  the  com- 
panies of  which  country  have  in  later  years  also  embarked 
in  the  world-wide  business. 

In  the  various  kingdoms  and  provinces  which  now 
constitute  the  German  Empire,  as  has  been  mentioned 
before,  the  various  communal  guilds  had  provided  some 
crude  form  of  insurance  for  their  members,  antl  in  many 
places  this  function  was  transferred  to  the  various  munici- 


10  YALE  READINGS  IN  INSURANCE 

palities  as  the  guilds  disappeared.  One  writer  describes 
this  process  as  follows:  ''As  the  absolute  monarchical 
police-state  constitutes  the  bridge  between  the  middle 
ages  and  modern  times,  so  too  the  transition  from  the 
mediaeval  guild  plan  of  mutual  help  to  the  modern  system 
was  bridged  by  state  insurance.  The  guilds  of  the  middle 
ages  lost  their  importance  and  private  industry  was  not 
rapid  enough  to  supply  the  void  left  by  them,  and  so  the 
state  was  forced  to  step  into  the  breach."  ^ 

Such  public  fire  insurance  outside  of  Germany  is  still 
to  be  found  in  German-Austria,  Denmark,  Switzerland, 
and  Scandinavia.  At  a  comparatively  recent  date  about 
40  per  cent,  of  the  outstanding  insurance  in  Germany  was 
carried  by  the  institutions  conducted  by  the  government 
or  by  various  municipalities.  Throughout  Germany  and 
Switzerland  to-day  all  buildings  of  ordinary  occupancy 
are  assm'ed  by  the  government  as  soon  as  built.  Each 
owner  is  assessed  pro  rata,  according  to  the  appraised 
value  of  his  own  insured  buildings,  for  the  losses  within 
the  state.  Money  payments  are  not  made  by  the  state 
in  event  of  loss,  but  the  damage  is  repaired  or  the  building 
replaced  by  the  government.  The  necessity  for  insurance 
on  other  classes  of  property  than  buildings  caused  the 
formation  of  the  first  stock  company  in  Germany  in  1812, 
since  which  time  many  companies,  both  stock  and  mutual, 
have  arisen,  also  various  local  associations  similar  to  the 
old  guilds  and  perhaps  descendants  from  them. 

In  France,  while  various  insurance  companies  were  set 
on  foot  during  the  second  and  third  quarters  of  the  eigh- 
teenth centm-y,  all  perished  during  the  general  financial 
collapse  which  accompanied  the  French  Revolution.  The 
first  regular  stock  company  organized  thereafter  seems  to 
date  from  1818. 

In  other  European  countries  fire  insurance  seems  to 
have  had  even  a  later  development  —  thus  in  Austria  the 
first  stock  company  was  organized  in  1822,  and  the  first 

»  J.  S.  Bloomingston,  Ph.D.,  "Fire  Insurance." 


FIRE  INSURANCE  IN   EUROPE  11 

mutual  company  in  1825.     In  Russia  the  first  company 
appeared  in  1827. 

In  all  civilized  countries  there  are  now  fire  insurance 
companies,  even  in  China. 

Methods  and  plans  vary  in  different  parts  of  Europe. 
In  France,  under  the  Code  Napoleon,  every  individual  is 
liable  for  loss  or  damage  which  may  happen  to  others 
through  his  fault.  In  case  of  fire  the  law  holds  that  the 
fault  rests  with  the  tenant  or  owner  on  whose  premises  the 
fire  originates,  unless  he  can  prove  himself  without  fault; 
in  other  words,  the  burden  of  proof  is  on  him.  Hence  a 
tenant,  for  example,  takes  out  insurance  first  on  his  own 
personal  property;  second,  to  protect  him  against  possible 
claims  to  be  made  by  his  landlord,  and  third,  to  protect 
him  against  possible  liability  to  his  neighbors  for  damages 
resulting  from  fires  attributable  or  attributed  to  his  care- 
lessness or  negligence.  It  would  be  highly  instructive  to 
compare  more  completely  the  varying  conditions  and 
methods  under  and  by  means  of  which  the  business  of 
fire  insurance  is  conducted  in  different  parts  of  the  world, 
but  we  cannot  attempt  it  here. 


CHAPTER  II 

HISTORY  OF  FIRE  INSURANCE  IN  THE   UNITED  STATES  * 

In  a  history  of  fire  insurance  in  this  country  one  must 
of  necessity  consider  whence  the  business  came,  the  stage 
of  its  development,  when  it  came  and,  to  some  degree, 
its  originating  cause.  Only  enough  can  be  said  on  these 
points  to  identify  its  origin,  establish  the  line  of  descent, 
and  set  forth  how  and  when  it  came  to  be  brought  to  this 
country.  Furthermore,  the  consideration  of  so  large  a 
subject  in  a  brief  paper  can  only  be  of  a  skeleton  char- 
acter with  a  fair  emphasis  upon  some  of  the  formative 
factors. 

One  of  the  results  of  the  great  fire  of  London  in  1666 
was  the  devising  of  plans  for  the  protection  of  individuals 
against  loss  by  fire.  The  great  fire  of  London  was  rela- 
tively the  greatest  in  the  history  of  the  world,  over  three- 
fourths  of  the  buildings  in  the  city  having  been  destroyed, 
and  the  estimated  loss  aggregating  about  ten  million 
pounds  sterling.  So  great  indeed  was  this  loss  that,  ten 
years  later,  the  buildings  had  not  all  been  replaced.  Quite 
a  number  of  plans  were  tried,  and  before  the  close  of  the 
century  a  company,  which  finally  became  the  Hand-in- 
Hand,  was  established.  In  1706  Charles  Povey  opened 
an  office  in  London  for  insuring  property  owners  in  that 
city  against  loss  from  fire,  but  his  plan  merely  involved 
his  promise  to  pay.  Shortly  after  this  first  attempt  he 
started   another   enterprise   for   the   purpose   of   insuring 

>  By  F.  C,  Oviatt,  late  Editor  of  the  Philadelphia  Intelligencer. 
Reprinted  from  pages  335-858,  Volume  XXVI  of  the  Annals  of  the 
American  Academy  of  Political  and  Social  Science. 

12 


FIRE  INSURANCE  IN  THE  UNITED  STATES      13 

against  loss  from  the  destruction  by  fire  of  personal  prop- 
erty throughout  Great  Britain  and  Ireland,  and  in  1710 
organized  a  proprietary  or  stock  company  which  took 
over  these  two  institutions,  and  which  was  named  the 
Sun  Fire  Office,  though  commonly  referred  to  at  present 
as  the  Sun,  of  London,  which  still  exists  as  one  of  the 
leading  fire  insurance  corporations  of  the  world,  and  is  as 
familiarly  known  in  this  country  as  at  home.  In  1720 
two  more  companies  were  chartered,  which  still  exist,  and 
both  of  which  maintain  branches  in  the  United  States, 
namely,  the  Royal  Exchange  and  the  London  Assurance. 

Fire  insurance  may  be  said  to  be  due  to  an  idea  born 
of  necessity  and  only  existing  at  the  beginning  of  the 
eighteenth  century  in  a  crude  and  experimental  form. 
The  period  being  the  colonizing  one,  the  Englishmen  who 
came  as  settlers  to  this  country  brought  the  idea  with 
them,  so  that  the  development  of  the  thought  of  making 
the  fire  loss  less  burdensome  to  the  individual  is  as  much, 
if  not  more,  American  than  British.  Originating  in  Eng- 
land, two  separate  lines  of  fire  insurance  development 
have  been  carried  forward,  each  influenced  by  local  features 
of  indemnification,  but  with  remarkable  fidelity  to  type, 
and  from  these  differing  lines  of  development  has  grown 
up  an  international  business  factor  of  large  importance. 

Having  noted  its  origin  and  traced  the  line  of  descent, 
let  us  now  follow  the  fortunes  of  the  younger  branch  of 
the  fire  insurance  family  as  developed  in  this  country.  In 
doing  this  it  may  be  noted  that  fire  insurance  and  the 
more  employed  marine  insurance  became  early  factors 
in  the  commercial  development  of  the  colonies.  They 
grew  with  the  growth  of  the  business  of  the  country,  and 
have  been  pai't  of  the  bone  and  sinew  of  material  prosperity 
of  the  American  peopk'. 

The  first  forms  of  insurance  in  this  country  were  marine. 
In  1682,  as  we  are  informed  from  records,  V(\ssels  engaged 
in  trade  between  England  and  the  colonies  were  insured 
against   the  perils  of  the  sea,  and  as  early  as  1721    an 


f 


14  YALE  READINGS  IN  INSURANCE 

advertisement  appeared  in  the  American  Weekly  Mercury 
announcing  that  John  Copson,  of  High  Street,  Philadelphia, 
would  open  an  office  for  insurance  on  "vessels,  goods 
and  merchandise."  For  a  long  period  the  insurance  busi- 
ness of  the  colonies  continued  to  be  marine;  part  of  it 
being  written  by  agents  of  English  companies,  and  the 
remainder  being  issued  in  American  ports.  In  1762,  at 
the  London  Coffee  House,  at  the  southwest  corner  of  High 
and  Front  Streets,  Philadelphia,  John  Kidd  and  William 
Bradford  announced  that  they  would  underwrite  risks 
in  general,  and  before  the  close  of  the  century  a  consider- 
able number  of  such  offices  had  been  established.  In 
Philadelphia  the  first  steps  toward  the  protection  of 
property  took  the  form  of  organizations  for  the  extin- 
guishment of  fires  and  regulations  concerning  the  nature 
and  location  of  buildings.  In  1730  the  city  authorized 
the  purchase  of  three  more  engines,  four  hundred  buckets, 
twenty  ladders,  and  twenty-five  hooks,  and  in  1752  with 
approximately  2,076  dwelling  houses  (not  including 
churches,  public  buildings,  warehouses,  and  workshops), 
the  city  possessed  seven  fire  extinguishing  companies. 

In  this  same  year  the  Pennsylvania  Gazette,  under  date 
of  February  18,  contained  an  advertisement  of  proposed 
articles  of  insurance  of  houses  from  fire  in  or  near  the  city. 
The  plan  had  the  approval  of  the  lieutenant-governor 
of  the  province  and  of  Benjamin  Franklin,  and  on  April  13 
directors  were  elected,  and  the  Philadelphia  Contribution- 
ship  was  thus  formally  organized,  being  the  first  fire  insur- 
ance company  to  be  organized  in  the  United  States.  Its 
plans  were  an  adaptation  of  those  of  the  Hand-in-Hand 
of  London;  in  fact,  the  company  became  quite  generally 
known  as  the  Hand-in-Hand,  and  its  first  house  mark  was 
four  hands  clasping  wrists.  One  curious  incident  should 
be  noted.  The  directors  of  the  Contributionship  in  1781 
decided  that  houses  having  trees  planted  before  them 
should  not  be  insured,  because  the  trees  made  it  difficult  to 
fight  fires.    This  policy  created  considerable  friction  and 


FIRE   INSURANCE  IN  THE  UNITED  STATES      15 

opposition,  out  of  which  grew,  in  1784,  the  Mutual  Assur- 
ance Company.  The  house  mark  of  this  new  company- 
was  a  green  tree,  cast  in  lead,  fastened  to  a  shield-shaped 
board,  affixed  to  the  front  of  the  insured  property.  Both 
of  these  companies  are  still  in  existence  and  continue  to 
transact  business  along  the  same  general  lines  as  at  first, 
namely,  what  is  known  as  perpetual  insurance.  This,  in 
brief,  is  a  deposit  of  a  certain  percentage  of  the  face  value 
of  the  policy  which  is  paid  once  for  all,  the  interest  on  it 
proving  sufficient  to  provide  for  the  losses  sustained.  In 
1794  the  Baltimore  Equitable  Society,  operating  upon 
the  same  general  plan,  was  established. 

In  December,  1792,  the  General  Assembly  of  Pennsyl- 
vania was  petitioned  for  permission  to  incorporate  the 
Insurance  Company  of  North  America,  and  on  April  14, 
1794,  the  incorporation  of  the  company  was  authorized, 
and  almost  immediately  thereafter  that  of  the  Insurance 
Company  of  the  State  of  Pennsylvania.  Both  of  these 
companies  were  organized  to  transact  marine  insurance, 
but  during  the  first  year  of  the  North  America's  existence, 
the  directors  concluded  to  add  the  business  of  fire  insur- 
ance, and  the  proposals  for  insurance  were  completed  in 
the  latter  part  of  the  year.  The  proposals  were  for  insur- 
ing full  value.  Two  general  hazards  were  provided  for; 
the  first  class  including  common  insurances  and  providing 
for  brick  or  stone  houses,  stores  and  furniture  or  mer- 
chandise therein,  wliile  the  second  included  those  houses 
which  were  not  wholly  brick  and  stone  and  such  extra 
hazardous  goods  as  pitch,  tar,  turpentine,  etc.  For  the 
first  class  the  rate  was  thirty  cents  per  hundred  on  an 
eight  thousand  dollar  policy  and  forty-five  cents  on  a 
policy  not  exceeding  sixteen  thousand  dollars;  while  in 
the  second  class  the  rates  were  seventy-five  cents  per 
hundred  dollars. 

The  earliest  company  in  New  York,  of  which  we  have 
any  record,  was  the  Knickerbocker  Fire,  organized  April  3, 
1787,    under   a   deed   of   settlement.     The   original    tiilo, 


16  YALE  READINGS   IN   INSURANCE 

however,  was  that  of  the  Mutual  Insurance  Company, 
the  name  Knickerbocker  not  being  assumecTimtiriViay  12, 
1846.  The  company  was  by  its  charter  permitted  to 
transact  fire,  marine,  and  hfe  insurance,  and  in  less  than  a 
,  month  the  New  York  Insurance  Company  was  organized 
with  practically  the  same  privileges.  Three  years  later, 
March  21,  1801,  the  Colmnbian  Insurance  Company  of 
New  York  was  organized,  and  on  April  4,  1806,  followed 
the  incorporation  of  the  Eagle  Fire  with  a  capital  stock  of 
$500,000,  and  now  the  oldest  New  York  stock  fire  insur- 
ance company.  Most  of  the  companies  in  New  York 
organized  during  the  latter  part  of  the  eighteenth  century, 
and  the  first  forty  years  of  the  nineteenth  century,  were 
what  are  known  as  special  charter  companies  and,  follov/- 
ing  the  development  of  the  day,  most  of  them  were  organ- 
ized for  the  purpose  of  writing  marine  insurance.  Another 
of  the  early  New  York  companies  which  is  still  in  business 
is  the  Albany  Insurance  Company,  which  was  organized 
in  March,  1811.  The  charters  of  most  of  the  companies 
of  this  day  were  what  are  known  as  limited  charters. 
Some  of  them  were  for  twenty  years,  some  for  thirty,  but 
the  princij^le  of  limitation  was  quite  generally  and  dis- 
tinctly recognized. 

Commerce  early  became  an  important  part  of  New 
England  development,  and  most  of  the  towns  were 
seaports  or  situated  at  the  head  of  navigation  on  the 
more  important  rivers.  As  soon  as  the  New  Englander 
began  to  trade,  he  recognized  the  hazards  which  attended 
the  transportation  of  merchandise.  No  sooner  was  this 
recognized  than  marine  insurance  in  its  earlier  forms  made 
its  appearance.  The  marine  companies  in  New  England, 
as  in  other  parts  of  the  country,  issued  fire  insurance 
policies  as  soon  as  there  was  a  call  for  them.  Fire  insur- 
ance, however,  did  not  seem  as  important  as  marine 
insurance,  and  the  stronger  of  the  early  insurance  com- 
panies devoted  more  of  their  attention  to  water-borne 
merchandise.     In  1799  there  was  organized  at  Providence, 


FIRE  INSURANCE  IN  THE  UNITED   STATES         17 

the  Providence-Washington,  which  still  continues  to  do 
a  prosperous  business. 

The  early  underwriting  in  Connecticut,  as  in  the  other 
colonies,  was  generally  of  a  personal  or  partnership  charac- 
ter. It  should  be  remembered  that  the  country  in  the 
last  decade  of  the  eighteenth  century  was  poor.  Its 
capital  had  been  very  largely  exliausted  by  the  Revolu- 
tionary struggle,  and  enterprises  which  had  been  prosper- 
ous had  been  completely  disorganized,  and  during  the  whole 
period  of  the  confederacy  the  uncertainty  of  the  future 
paralyzed  to  a  large  extent  the  commercial  life  of  the 
colonies.  The  industrial  life  of  Connecticut  was  sunple; 
coarse  articles  for  necessary  use  were  manufactured,  and 
the  surplus  products  of  agriculture  and  merchandise  of 
home  manufacture  were  exported  to  the  West  Indies.  In 
■  1792  the  Hartford  Bank  and  the  Union  Bank  of  New 
London  were  organized,  and  with  the  business  develop- 
ment which  followed  the  organization  of  these  institutions 
insurance  partnerships  came.  Thus,  in  1794,  Sanford  and 
Wadsworth  opened  an  office  in  Hartford  for  insuring 
furniture,  merchandise,  etc.,  against  fire,  and  the  next 
year  associated  with  themselves  Jeremiah  Wadsworth, 
John  Caldwell,  Elias  Shipman,  and  John  Morgan  in  a 
copartnership  under  the  title  of  the  Hartford  and  New 
Haven  Insurance  Company  for  the  purpose  of  insuring 
vessels,  stock,  merchandise,  etc.  In  1797  Elias  Shipman 
established  a  separate  office  in  New  Haven  which  was 
chartered  as  the  New  Haven  Insurance  Company,  but 
which  retired  in  1833.  The  men  interested  in  these 
insurance  ventures,  for  they  were  ventures,  were  the  mer- 
chants of  the  leading  cities,  Hartford  taking  and  holding 
a  connnanding  position.  Jeremiah  Wadsworth,  one  of 
the  leading  spirits  in  the  mercantile  and  financial  life  of 
Hartford,  was  well  known  outside  of  that  state,  since,  for 
example,  he  was  one  of  the  founders  of  the  Bank  of  North 
America  of  Philadelphia  in  1781,  holding  one  hundred 
and   four  shares  of  the  original  stock.     In  1785  he  was 


18  YALE  READINGS  IN  INSURANCE 

elected  president  of  the  Bank  of  New  York,  and  was  also 
interested  in  the  organization  of  the  Hartford  Bank. 
This  note  of  Colonel  Wadsworth  is  given  so  that  the  charac- 
ter of  the  men  who  engaged  in  early  Connecticut  under- 
writing may  be  understood,  and  the  reason  seen  why 
Hartford  has  always  held  such  a  prominent  position  in 
the  underwriting  world.  It  is  because  men  of  brains, 
means,  and  faith  established  the  business. 

As  these  partnership  policies  involved  a  great  deal  of 
labor  the  organization  of  a  corporation  seemed  a  very 
natural  step,  and  in  1803  a  charter  was  procured  for 
the  Hartford  Insurance  Company.  The  business  of  this 
company  was  marine  and  the  capital  was  $80,000  in  shares 
of  $40  each.  Twenty-five  per  cent,  was  paid  in  notes  and 
75  per  cent,  in  notes  secured  by  mortgages.  But  in  1825 
the  company  was  merged  in  the  Protection  Insurance 
Company.  About  this  time  also,  a  group  of  companies 
was  organized  for  the  purpose  of  writing  marine  insurance, 
but  most  of  them  were  obliged  to  go  out  of  business  on 
account  of  the  depression  in  marine  commerce  consequent 
upon  the  War  of  1812.  Some  idea  of  the  paralysis  of 
commerce  of  the  United  States  caused  by  the  embargo 
and  non-intercourse  acts  is  to  be  gathered  from  the  fact 
that  exports  fell  from  $110,084,207  in  1807  to  $22,430,960 
the  following  year.  Duties  on  imports  at  New  London 
shrunk  from  $201,838  in  1807  to  $22,343  in  1810.  Most 
of  the  marine  companies  were  killed  as  a  result  of  the 
depression.  The  Norwich  was  saved  by  changing  its 
business  to  fire  insurance  in  1818  and,  as  noted  above,  the 
Hartford  was  transformed  into  the  Protection. 

The  oldest  fire  insurance  company  in  Connecticut  is 
the  Mutual  Assurance  of  the  city  of  Norwich,  which  was 
organized  in  May,  1795,  under  a  deed  of  settlement.  The 
company  has  never  attempted  to  do  a  large  business, 
being  largely  a  neighborhood  affair.  In  1810  the  Hart- 
ford Fire  was  organized  and  is  thus  the  oldest  stock  fire 
insurance   company  in   the   state.    The   original   capital 


FIRE  INSURANCE  IN  THE  UNITED  STATES      19 

was  $150,000,  with  privilege  of  enlargement  to  $250,000. 
The  subscribers  were  obliged  to  pay  in  5  per  cent,  in  thirty 
days  and  5  per  cent,  more  in  sixty  days,  the  remaining 
90  per  cent,  to  be  secured  by  notes  and  mortgages.  There 
was  not  a  great  deal  of  money  to  be  had  in  those  days, 
consequently  notes  and  mortgages  had  to  form  the  prin- 
cipal basis  of  corporate  organization.  The  organizers  of 
this  company  had  everything  to  learn,  because  they  knew 
nothing  about  fire  insurance,  for  there  was  not  much 
to  be  known.  It  was  chance,  pure  and  simple.  There 
were  no  data  by  which  the  cost  and  the  charge  could  be 
brought  into  anything  like  proportionate  relations.  Some 
idea  of  rates  may  be  gathered  from  the  charges  on  a  few 
of  the  early  policies.  Number  one  was  a  builder's  risk 
of  $4000  for  three  months  at  twelve  and  a  half  cents. 
Number  five  was  $10,000  on  a  gin  distillery  at  Ij  per  cent. 
Numbers  twenty-one  and  twenty-two  were  $20,000,  being 
respectively  on  a  stock  of  drygoods  and  hardware,  the 
former  at  seventy-five  cents  and  the  latter  at  twenty-five 
cents.  The  year  after  the  company  organized,  it  began 
to  plant  agencies,  but  without  any  system.  For  instance, 
there  was  one  agency  at  Canandaigua,  N.  Y.;  another  at 
Middlebury,  Vt.,  and  by  1820  an  agency  had  been  estab- 
lished at  Cleveland,  Ohio.  As  showing  the  relative  im- 
portance of  cities  and  towns,  it  should  be  noted  that  it 
was  not  until  1821  that  an  agency  was  established  in  New 
York  City.  The  compensation  was  a  sort  of  graded  com- 
mission, determined  by  the  importance  of  the  town. 
Three  of  the  agents  were  given  10  per  cent,  on  all  premiums 
received  exceeding  $1000  for  any  one  year,  while  in  the 
early  years  some  gratuities  were  voted  by  the  directors 
to  those  who  had  rendered  special  services.  The  president 
received  no  salary  until  1823,  when  he  was  paid  $200  per 
annum,  voted  semi-annually  after  the  work  had  been 
done. 

The  first  secretary  of  the  Hartford  Fire,  Walter  Mitchell, 
did  not  live  in  Hartford,  but  in  Wethersfield,  and  appears 


20  YALE  READINGS  IN  INSURANCE 

to  have  suited  his  own  convenience  as  to  office  hours. 
His  convenience  was  not  exactly  the  convenience  of  the 
citizens  of  Hartford,  and  so  in  1819  the  ^Etna  was  organ- 
ized, with  a  capital  of  $150,000  with  the  privilege  of  increas- 
ing it.  The  first  policy  of  the  iEtna  was  issued  August  7, 
1819,  and  about  a  month  later  the  first  reinsurance  known 
in  this  country  was  entered  into  by  the  ^tna  when  it 
assumed  all  of  the  outstanding  risks  of  the  Middletown 
Fire.  It  rather  liked  the  experience  apparently,  because 
three  years  later  it  was  willing  to  reinsure  the  New  Haven 
Fire,  w^hich  reinsurance,  however,  was  secured  by  the 
Hartford.  In  the  beginning  of  the  fire  insm*ance  business, 
the  matters  which  are  now  sent  to  trained  experts  were 
considered  by  the  board.  The  vital  portions  of  each 
policy  with  the  survey  were  read  to  the  board  of  directors 
before  delivery.  The  officers  and  directors  did  quite  a 
little  traveling  or  exploring,  and  on  these  trips,  made 
from  time  to  time,  agents  were  appointed,  which  was  the 
principal  work  of  a  fire  underwriter  when  traveling  in 
those  days.  In  1822  the  directors  of  the  ^Etna  voted  the 
secretary  two  dollars  per  day  and  his  expenses  when  he 
went  out  to  establish  agencies;  while  he  was  drawing  his 
per  diem  allowance,  however,  his  salary  as  secretary  was 
suspended,  since  they  did  not  believe  in  paying  for  work 
which  was  not  performed.  The  secretarj'',  however,  did 
not  do  all  of  the  pioneering  work,  much  of  it  being  done 
by  the  directors. 

The  pluck  of  these  early  underwriters  is  well  illustrated 
by  the  action  of  the  ^Etna  directors  in  the  matter  of  set- 
tling the  losses  incurred  by  the  great  fire  of  1835  in  New 
York.  The  ^Etna's  losses  amounted  to  $115,000.  The 
directors  were  notified  that  the  fire  would  probably  exhaust 
the  entire  resources  of  the  company,  and  one  of  the  direc- 
tors asked  President  Brace  what  he  intended  to  do.  "  Do? " 
he  replied,  "go  to  New  York  and  pay  the  losses  if  it  takes 
every  dollar  there,"  pointing  to  the  securities  of  the  com- 
pany, "and  my  fortune  besides."    The  directors  pledged 


FIRE  INSURANCE  IN  THE  UNITED  STATES      21 

him  their  support  and  the  losses  were  paid.  The  pre- 
mium receipts  increased  so  rapidly  that  in  twelve  months 
the  iEtna  had  as  much  cash  as  before  the  fire.  It  was 
the  same  spirit  which  led  the  shareholders  to  contribute 
$2,500,000  to  maintain  the  technical  solvency  of  the 
company  after  the  Chicago  and  Boston  fires.  The  success 
of  institutions  with  such  men  in  charge  is  assured  when 
they  take  hold. 

Until  the  close  of  the  century  there  had  been  about 
ten  mutual  and  four  stock  companies,  organized  in  the 
country,  while  by  1820  this  number  had  increased  to 
seventeen  stock  companies  in  New  York,  six  in  Pennsyl- 
vania, two  in  Connecticut,  and  one  each  in  Rhode  Island, 
New  Jersey,  and  Massachusetts.  Of  these,  twelve  are  still 
doing  business.  It  should  be  noted  here  that  very  early 
in  the  history  of  the  business  an  attempt  to  exclude 
foreign  insurance  companies  was  made.  Statutes  were 
enacted  in  Pennsylvania  and  New  York  in  1810  and  1814 
respectively,  forbidding  foreign  companies  to  transact 
business  in  this  country.  These  prohibitory  statutes 
continued  in  force  until  after  the  great  fire  in  New  York 
in  1835,  which  rendered  necessary  the  enlargement  of^ 
the  sources  from  which  fire  insurance  indemnity  might 
be  secured.  Most  of  the  early  companies  transacted  both^ 
fire  and  marine  insurance.  As  the  business  of  the  country 
developed,  the  people  began  slowly  to  recognize  the  im- 
portance and  necessity  of  fire  insurance,  though  for  many 
years  the  growth  of  public  recognition  was  slow.  The 
burden  of  the  fire  loss  in  the  smaller  communities  was 
quite  largely  borne  by  voluntary  contribution.  A  man's 
house  or  barn  was  burned  and  the  owner's  neighloors 
made  uj)  a  purse  which  should  enable  him  to  rebuild,  or 
help  him,  at  least,  to  get  a  new  start;  and  in  some  portions 
of  the  country  this  practice  obtained  until  past  the  middle 
of  the  nineteenth  century.  In  some  of  the  mimicipalities, 
ordinances  were  enacted  which  compelled  owners  of 
property  to   have  and  keep  in  repair   leathern  buckets. 


22  YALE  READINGS  IN  INSURANCE 

Some  idea  of  the  slow  development  of  the  business  can  be 
gathered  from  the  fact  that  while  the  Insurance  Company 
of  North  America  decided  on  its  form  of  fire  insurance 
policy  in  November,  1794,  it  had,  one  year  later,  issued 
only  seventy-three  policies.  In  1796  this  company 
decided  to  accept  risks  in  any  part  of  the  United  States, 
if  the  premiums  were  adequate  to  the  risk  in  the  opinion 
of  the  officers,  and  in  that  year  it  had  risks  on  its  books  in 
Western  Pennsylvania,  New  Jersey,  New  York,  Massa- 
chusetts, Delaware,  Maryland,  Virginia,  North  and  South 
Carolina.  In  1798  it  declined  an  application  from  an 
agency  in  Charleston,  S.  C,  but  in  1807  the  company 
decided  to  authorize  agents.  There  was  quite  a  rapid 
growth  of  companies  during  the  first  thirty  years  of  the 
nineteenth  centmy,  which  companies,  as  a  rule,  were 
purely  local,  there  being  only  one  here  and  there  which 
transacted  any  business  to  speak  of,  outside  of  the  cities 
where  it  was  located.  There  was  but  little  security  behind 
the  policies  issued  beyond  the  current  receipts  and  the 
good  faith  of  the  men  who  managed  the  companies. 

The  great  New  York  fire  of  1835  swept  out  of  existence 
most  of  the  New  York  companies.  This  fire  closes  what 
may  be  termed  the  first  period  of  American  fire  insurance, 
a  period  devoted  almost  wholly  to  pioneering.  While 
many  of  the  corporate  ventm'es  were  failures,  still  the 
lessons  of  the  period  pointed  the  way  to  the  more  perfect 
development  which  was  to  follow.  Mistakes  were  dis- 
covered and  steps  taken  to  correct  them.  A-  question  asked 
of  Edwin  G.  Ripley,  for  example,  led  to  the  classification 
of  risks.  One  of  the  patrons  of  the  company,  noticing 
the  frequency  of  fires  in  certain  lines  of  business,  asked 
Mr.  Ripley  if  the  iEtna  made  money  on  paper  mills.  The 
question  was  a  poser,  but  he  straightway  began  to  get 
ready  to  answer  the  next  man,  and  so  started  the  classi- 
fication of  risks  several  years  in  advance  of  his  competitors. 
At  this  time,  also,  fire  insurance  in  the  large  cities  had 
become  a  recognized  factor  in  commercial  life.     Outside 


FIRE   INSURANCE  IN   THE   UNITED   STATES      23 

of  the  cities,  however,  it  was  looked  upon  with  more  or 
less  distrust,  or  perhaps  it  might  be  said  was  considered 
unnecessary. 

Turning  our  attention  to  the  second  period  we  find  new 
factors  entering  the  buisness.  The  public  demanded 
more  certainty  in  the  matter  of  the  contracts  and  greater 
provision  for  the  stability  of  the  companies,  so  in  1837  the 
first  step  was  made  in  the  direction  of  reservation.  The 
State  of  Massachusetts__£imdded„  that  companies  should 
maintain  a  fund  to^insure  their  contracts  being  carried 
out,  and  this  was  the  beginning  of  what  is  known  as  the 
unearned  premium  fund.  The  start  toward  this  is  an 
imp^Diifant^factor  in  development  as  it  marks  the  beginning 
of  two  things:  First,  making  siu-e  that  the  policy-holders 
shall  be  protected  in  the  contracts  they  have  entered  into 
with  the  companies;  and  second,  the  entrance  into  the 
fire  insurance  field,  of  the  state,  which,  from  this  modest 
beginning  as  will  be  seen  later,  has  gradually  developed 
the  extensive  system  now  known  as  state  supervision. 

The  development  of  this  idea  of  reservation  is  interest- 
ing, especially  in  view  of  the  fact  that  it  is  recognized 
to-day  as  one  of  the  corner-stones  of  successful  fire  under- 
writing. In  1853  the  New  York  lipgislfl.tnrp  enacted  a 
law  providing  for  what  is  known  as  the  unearned  premium 
reserve.  By  the  terms  of  this  law,  a  reihsurahce^und 
ranging  from  about  30  to  60  per  cent,  of  the  unexpired 
premiums  was  required  to  be  maintained.  The  sum  thus 
set  aside,  which  became  a  liability,  was  assumed  to  be 
sufficient  to  reinsure  in  a  solvent  company  the  unexpired 
risks  of  a  company  which  desires  from  any  reason  to  retire 
from  buisness.  The  legislature  tinkered  with  the  law  in 
1862,  providing  for  the  reservation  of  the  full  amount 
of  the  unexpired  premiums  in  all  cases  where  dividends 
exceeding  10  per  cent,  were  paid.  The  companies  con- 
sidered this  a  burden  and  sixty  companies  petitioned  the 
legislature  to  cliange  the  law  requiring  100  per  cent,  reser- 
vation to  one  fixing  the  percentage  at  50  per  cent,  of  the 


24  YALE  READINGS  IN  INSURANCE 

premiums.  The  New  York  insurance  department  opposed 
this  request,  and  justified  its  opposition  by  figuring  out 
from  the  loss  record  that  a  50  per  cent,  reinsurance  fund 
was  inadequate.  This  subject  of  reservation  and  divi- 
dends was  also  discussed  by  the  Massachusetts  supervising 
officials,  and  in  the  ninth  annual  report  of  the  Massachusetts 
insurance  department  it  was  proposed  to  establish  what 
was  known  as  a  "state  guarantee"  by  which  the  com- 
panies should  pay  an  annuaLlax^  There  were  to  be  three 
classes  under  this  scheme;  the  first,  where  less  than  two 
million  dollars  of  risks  were  insured,  the  dwelling-house 
tax  was  to  be  five  cents  on  every  hundred  dollars  insured 
and  ten  cents  per  hundred  on  other  buildings  and  personal 
property;  the  second  class,  where  the  amount  at  risk  was 
between  two  and  six  million  dollars,  was  to  pay  a  tax  of 
two  cents  and  four  cents  per  hundred  at  risk ;  and  the  third 
class,  where  the  amount  at  risk  was  over  six  million  dollars, 
the  tax  was  to  be  one-half  cent  and  one  cent  on  each 
hundred  dollars  insured.  This  shows  the  experimenta- 
tion indulged  in  by  state  departments  for  the  purpose  of 
getting  the  business  upon  a  sound  loss-paying  basis.  In 
these  early  days  of  state  supervision,  companies  desiring 
a  license  were  examined  by  special  commissions.  The 
requirements  were  slight,  and  not  infrequently  the  com- 
panies of  this  period  were  obliged  to  go  out  of  business 
within  a  few  years  after  organization.  When  the  condi- 
tions which  existed  in  the  fifties  and  sixties  are  compared 
with  those  of  the  present  day,  it  will  be  seen  that  the 
evolution  of  the  business  has  been  steadily  toward  cer- 
tainty so  far  as  the  policy-holders  are  concerned,  though 
no  means  have  been  devised  to  prevent  the  capital  invested 
from  being  dissipated  through  bad  management  and  exces- 
sive losses. 

Another  feature- oLlhesecond  period  was  the  develop- 
ment of  the  mutual  idea.  xThe  New  York  fire  of  1835 


destroyed  a  great  majority  of  the  New  York  companies. 
This  created  a  feeling  of  distrust  in  the  public  mind,  and 


FIRE  INSURANCE  IN  THE  UNITED  STATES      25 

the  organization  of  mutual  companies  became  the  order 
of  the  day,  and  by  1853  sixty-two  companies  reported 
to  the  comptroller  of  New  York,  having  an  aggregate 
capital  of  over  eleven  million  dollars.  The  mutual  plan 
commended  itself  to  the  people  of  that  day  as  correct 
theoretically  and  economical  in  operation.  In  practice, 
however,  these  companies  proved  unsatisfactory  for  the 
reasons  that  they  were  based  upon  incorrect  principles 
and  because  of  a  lack  of  staying  power.  One  of  the 
weaknesses  of  the  mutual  plan  in  practice  is  admirably 
stated  in  the  report  of  James  M,  Cook,  comptroller  of 
New  York  in  1854,  in  which  he  says:  ''The  formation  of  a 
mutual  insurance  company  upon  a  proper  and  sound 
basis  never  contemplated  the  taking  of  risks  in  other 
states  than  our  own." 

The  mutual  companies  had  attempted  to  operate  upon 
the  same  basis  as  the  stock  companies  did.  The  mortality 
among  the  mutuals,  however,  was  excessive.  A  general 
insurance  law  was  enactcil  in  1,S40,  and  during  the  suc:;;__ 
ceedTiig  four  years  over  fifty-four  mutual  companies  were 
organized.  By  1860,  however,  only  seven  of  these  sur- 
vived, and  Superintendent  of  Insurance,  Barnes,  of  New 
York,  estimated  that  the  losses  to  the  people  through  the 
failure  of  these  forty-seven  companies  averaged  at  least 
$50,000  per  company.  These  companies  were  organized 
with  premium  notes  as  capital  in  amounts  far  exceeding 
the  ordinary  and  legitimate  premiums  to  be  charged  in 
the  regular  course  of  business.  The  second  error  was  that 
of  permitting  mutual  companies  to  issue  both  mutual  and 
cash  policies.  These  mutual  waves  have  gone  over  the 
country  at  irregular  intervals  ever  since,  and  in  each  in- 
stance the  original  experience  has  been  duplicated  to  a 
greater  or  less  extent. 

Two  forms  of  mutual  companies  have  persisted.  One, 
township  mutuals,  which  as  long  as  they  confine  their 
operations  to  a  small  territorial  area,  where  every  person 
knows  every  other  person,  aid  in  the  distribution  of  the 


26  YALE  READINGS  IN  INSURANCE 

fire  loss  of  a  given  country  community  and  serve  their 
purpose  well.  Where  they  branch  out  and  attempt  to  do 
a  village  and  city,  or  general  business,  failure  is  inevitable. 
The  second  form  of  mutual  development  is  that  typified 
by  the  mill  mutuals.  These  are  based  upon  knowledge, 
inspection,  and  improvement.  They  have,  however,  in 
all  cases  ultimately  failed  as  mediums  for  transacting  a 
general  fire  insurance  business. 

The  companies  gradually  recovered  from  the  blow  of 
the  New  York  fire  and  in  a  few  years  additional  companies 
had  started  so  that  the  number  of  companies  was  in  a 
measure  commensurate  with  the  growing  business  of  the 
coimtry.  There  were  a  large  number  in  New  York,  Phila- 
delphia, and  Boston,  and  there  were  companies  in  other 
cities  where  there  was  enough  local  business  to  warrant. 
These  companies  served  the  business  of  the  country  well, 
as  a  whole,  and  only  began  to  retire  as  the  development 
of  the  country's  business  interests,  consequent  upon  the 
development  of  the  railway  system  and  the  telegraph, 
gave  the  company  doing  a  general  business  a  decided 
advantage  over  the  one  doing  a  local  business.  In  this 
period  also  state  supervision  took  a  definite  form  in  the 
shape  of  the  establishment  of  departments  by  New  York 
and  Massachusetts  and  gradually  by  other  states.  At- 
tempts were  also  made  to  devise  a  more  nearly  uniform 
fire  insurance  policy.  Up  to  this  time,  and  for  a  con- 
siderable time  thereafter,  each  company  devised  its  own 
policy  contracts.  It  took  what  seemed  to  be  good  out  of 
the  English  policies,  clipped  from  its  neighbors,  and  as 
one  man  with  much  experience  said,  this  was,  so  far  as 
policies  were  concerned,  the  period  of  scissors  and  paste 
pot. 

The  agents  and  the  companies,  principally  the  com- 
panies, in  some  of  the  large  cities,  formed  local  boards 
during  the  fifties.  These  boards,  dominated  mostly  by 
local  companies,  were  the  forerunners  of  the  present 
system  of  organizations  of  local  agents,  but  were  ma- 


FIRE  INSURANCE  IN  THE  UNITED  STATES      27 

terially  different  because  they  were  largely  experimental. 
Out  of  this  local  board  movement  also  grew  an  agitation 
for  better  fire  protection,  and  thus  while  in  the  early  his- 
tory of  the  country  nearly  all  the  fire  departments  were 
volunteer,  paid  departments  gradually  became  the  rule, 
and  the  companies  established  protective  departments  for 
the  protection  of  damaged  stocks  so  that  the  loss  might 
be  lessened  through  care.  The  successors  of  these  depart- 
ments are  the  fire  patrols  of  to-day.  Some  facts  concern- 
ing these  early  local  boards  may  be  of  interest.  In  1819 
an  organization  was  formed  in  New  York,  known  as  the 
Salamander  Society,  the  members  of  which  were  pledged 
not  to  deviate  from  established  rates  of  premium.  New 
companies  were  invited  to  join  and,  if  they  refused,  were 
to  be  specially  considered,  which  appears  to  have  been 
understood  and  acted  upon  as  a  threat.  This  organ- 
ization was  of  little  practical  significance,  and  was  fol- 
lowed by  another  organization  in  1826  and  another  in 
1857,  which  formed  the  fire  patrol  or  fire  police  in  1859. 
Some  few  attempts  were  made  in  the  late  thirties  and 
in  the  forties  towards  standard  rating,  but  merely 
amounted  to  a  faint  foreshadowing  of  the  system  which 
is  being  striven  for  to-day.  The  recoixl  of  the  New  York 
board  is  typical  of  most  of  the  local  boards  of  the  earlier 
day. 

Another  step  in  the  progress  of  this  period  was  the 
employment  of  special  agents,  better  known  as  field  men, 
owing  to  the  spreading  out  of  companies  which  did  busi- 
ness in  other  places  than  the  immediate  vicinity  of  the 
home  office.  The  strictly  local  company  could  supervise 
and  care  for  its  business  through  employees  of  the  home 
office,  "\\nien  distances,  however,  became  too  great  for 
this  class  of  employees,  men  had  to  be  employed  for  this 
special  work  of  looking  after  the  field.  At  first,  the  greater 
part  of  the  work  of  special  agents  was  the  adjustment  of 
losses,  though  they  paid  some  attention  to  the  agencies,  at 
times  inspecting  risks  and  authorizing  rates.     The  period 


28  YALE  READINGS  IN  INSURANCE 

under  review  was  one  when  the  West  was  being  settled, 
and  the  foundation  laid  for  the  magnificent  development 
of  the  latter  half  of  the  nineteenth  century.  These  pio- 
neers with  their  poorly  constructed  and  rapidly-growing 
villages  and  cities,  soon  felt  the  need  of  fire  insurance. 
Yet  the  Middle  West,  or  as  sometimes  termed,  "beyond 
the  Alleghanies,"  was  almost  an  unknown  land,  and  the 
ignorance  of  the  East  persisted  long  after  the  canal  boat, 
river  steamer,  and  railway  had  begun  to  open  this  region. 
In  the  history  of  the  early  days  of  insurance  in  Con- 
necticut, attention  was  called  to  the  fact  that  the  Hartford 
Insurance  Company,  organized  in  1803  to  write  marine 
insurance,  was  merged  in  1825  with  the  Protection,  organ- 
ized to  write  a  fire  insurance  business.  The  secretary  of 
the  Hartford  became  the  president  of  the  Protection, 
while  the  secretary  of  the  Protection,  Thomas  Clap 
Perkins,  had  much  to  do  with  the  pioneering  work  of  the 
Protection.  Ephraim  Robins,  a  merchant  of  Cincinnati, 
saw  a  notice  in  a  Hartford  paper  that  the  Protection  had 
been  formed.  Having  lost  most  of  his  property  in  a 
cyclone,  the  importance  of  insurance  was  presented  in 
a  very  forceful  way  to  the  mind  of  Mr.  Robins.  He  came 
to  Hartford,  presented  the  claims  of  the  West  in  such  a 
way  that  the  company  authorized  the  establishment  of  a 
western  department  with  Mr.  Robins  as  general  agent. 
This  was  in  1825,  and  the  task  of  planting  the  agencies  of 
the  company  in  Ohio  and  other  western  states  was  imme- 
diately started.  The  company's  office  was  a  sort  of  head- 
quarters for  prominent  Whig  politicians,  and  also  proved 
to  be  a  training  school  for  some  of  the  brightest  and  most 
successful  men  in  western  fire  insurance.  The  western 
department  of  the  Protection  was  the  beginning  of  the 
American  agency  system  on  anything  like  a  large  and  com- 
prehensive scale.  The  business  grew  rapidly  and  when 
Mr.  Robins  died  in  1846,  the  premiums  collected  by  the 
agency  amounted  to  three  million  dollars.  From  the 
western  office  of  the  Protection  went  the  forerunners  of 


FIRE  INSURANCE  IN  THE  UNITED   STATES      29 

the  modern  special  agent  or  field  man.  Tlie  Protection 
eventually  failed  because  it  did  not  build  up  a  large  enough 
surplus,  and  its  officers  did  not  really  know  where  the 
company  stood  owing  to  a  lack  of  systematic  knowledge. 
Following  the  Protection,  the  Insurance  Company  of 
North  America  and  the  JEtnsi  made  the  venture  into  the 
territory  west  of  the  Alleghanies,  the  former  locating  at 
Erie  and  the  latter  at  Cincinnati.  The  failure  of  the 
Protection  gave  a  great  impetus  to  the  development  of 
the  western  department  of  the  ^Etna,  as  it  was  in  the  field 
and  ready  to  make  the  most  of  the  opportunity  offered. 
In  1853  J.  B.  Bennett  became  general  manager  of  the 
Mtna  and  took  charge  of  the  western  business.  The  same 
year  that  he  took  charge  of  the  ^Etna's  affairs,  J.  B.  Bennett 
prepared  a  blank  proof  of  loss.  Before  this  time  these 
proofs  had  been  written  out  on  the  occasion  of  each  adjust- 
ment. This  was  a  waste  of  time  from  Mr.  Bennett's 
standpoint  and  so  he  prepared  a  form  which,  in  its  essen- 
tial features,  has  not  been  changed  since.  The  Hartford 
began  to  send  out  numbered  policies  in  1864.  These 
companies  employed  special  agents,  w^io,  working  under 
conditions  hard  to  realize  to-day,  went  up  and  down  the 
country,  appointing  agents,  inspecting  towns,  and  settling 
losses.  Indeed  the  fire  insurance  business  is  greatly 
indebted  to  these  men  for  their  faithful  labor.  Many  mis- 
takes were  made  in  this  period,  because  there  was  little 
cooperation,  but  still  there  was  a  gradual  approach 
toward  better  conditions  and  a  larger  and  more  compre- 
hensive development.  Nearly,  if  not  all,  of  the  com- 
panies organized  during  the  first  period  made  the  mistake 
of  dividing  too  large  a  proportion  of  the  profits,  and  thus 
not  leaving  enough  money  to  meet  the  drain  of  heavy 
losses.  When  a  big  hre  occurred  the  companies  found 
themselves  in  a  difficult  situation  and  several  times  it 
was  only  by  guaranteeing  by  the  directors  of  their  personal 
fortunes  that  a  company  was  enabled  to  survive.  This 
tendency  of  keeping  up  dividend  payments  at  the  expense 


30  YALE  READINGS  IN   INSURANCE 

of  surplus  continued  well  past  the  middle  of  the  nineteenth 
century,  and  the  importance  of  maintaining  a  good  work- 
ing surplus  was  not  full}^  realized  until  after  the  Chicago 
and   Boston   fires.     In   1864   the   superintendent   of    the 
New  York  insurance  department,  in  his  annual   report, 
declared    that    several    companies    were    accustomed    to 
declare  dividends  without  making   any  provision   at  all 
/^for   outstanding   risks.     Legislative   provision   was   made 
i   in  New  York  to  prevent  this,  as  in  1849,  it  was  enacted 
\     \  that  "no  dividend  should  ever  be  made  by  any  company 
1  when  its  capital  stock  was  impaired  or  when  the  making 
/  of  the  dividend  would  have  the  effect  of  impairing  its 
[  stock,  and  any  dividends  made  in  violation  to  such  sec- 
tion subjected  the  stockholders  to  an  individual  liability 
to  the  creditors  to  the  extent  of  the  dividend  so  received." 
Still  they  continued  the  practice  of  declaring  such  divi- 
dends until  forced  by  the  hard  school  of  experience  to 
transact  their  business  upon  business  principles. 

The  third  period  of  fire  insurance  development  begins 
practically  with  the  close  of  the  Civil  War.  This  may 
be  termed  the  period  of  cooperations.  Conditions  were 
very  unsatisfactory,  rates  were  low,  and  prosperity  for 
the  companies  was  not  very  apparent.  Hence,  in  1866,  the 
fire  insurance  companies  of  the  coun]|x_^^^Si^e3rtHe 
NatiojiarBoardof^Frre  Underwriters,  and  for  the  next 
ten  years  it  was  tlie  controlling  factor  in  fire  underwriting, 
and  marks  the  most  important  change  which  had  so  far 
been  brought  about  in  the  fire  insurance  business.  Its 
purpose  was  to  bring  about  a  cooperation  between  the 
companies  upon  matters  of  common  interest  and  to  insure 
adequate  rates  and  proper  forms.  At  this  time  there  were 
a  very  large  number  of  local  companies  and  quite  a  num- 
ber of  what  are  best  classified  as  agency  companies. 

Three  new  factors  came  into  the  fire  insurance  business 
about  this  time :  First,  the  daily  report,  devised  in  1867  to 
facilitate  the  transaction  of  business,  gradually  took  the 
place  of  the  old  monthly  statement,  but  was  slow  in  win- 


FIRE  INSURANCE   IN   THE   UNITED  STATES      31 

ning  favor  with  underwriters  since  some  of  the  managers 
preferred  the  old  form  of  reporting  as  being  more  satis- 
factory. The  original  form  of  the  daily  report,  devised 
by  Alexander  Stoddart,  has  not  been  materially  changed 
with  the  passing  years.  The  idea  was  to  select  good  men 
in  the  different  towns  as  representatives,  have  them 
examine  the  property  upon  which  insurance  was  sought 
and  send  in  a  daily  report,  containing  the  written  portion 
of  the  policy  and  diagram  of  its  exposures,  the  rate,  terms, 
etc.;  in  fact,  a  practical  reproduction  of  the  descriptive 
part  of  the  policy.  This  was  sent  to  the  home  office,  the 
agent  at  the  same  time,  writing  and  issuing  the  policy. 
If  the  company  did  not  care  for  the  risk,  it  notified  the 
agent  and  the  policy  was  withdrawn.  This  departure 
placed  a  very  great  responsibility  upon  the  local  repre- 
sentatives since  they  virtually  ^  passed  upon  the  business 
of  the  company  and  most  of  them,  be  it  said  to  their  credit, 
served  their  company  most  faithfully.  This  plan  was 
popular  and  was  gradually  adopted  by  all  the  companies. 
It  is  one  of  the  great  foundation  stones  of  the  modern 
agency  system. 

Out  of  this  idea  of  a  daily  report  grew  two  others.  The 
first  one  was  to  have  some  means  of  keeping  the  home 
or  branch  office  in  touch  with  the  agents,  and  also  afford- 
ing the  company  an  independent  source  of  information 
concerning  the  character  of  the  business  written.  For 
this  purpose,  the  special  agent  had  the  scope  of  his  employ- 
ment widened  beyond  the  mere  adjustment  of  losses.  He 
traveled  around  among  the  agents,  appointed  new  agents 
in  desirable  territory,  secured  an  idea  of  the  larger  risks 
and  special  hazards  of  the  towns  he  visited,  saw  to  it  that 
the  agents  kept  their  monthly  accounts  paid  up  and, 
generally  speaking,  was  the  hand  of  the  company  in  the 
field.  Soon  the  incompleteness  of  the  information  fur- 
nished the  home  or  branch  office  as  to  the  physical  charac- 
ter of  the  risks  and  thcii-  environment  presented  a  problem 
which  had  to  be  solved.     To  solve  this,  the  special  agents 


32  YALE  READINGS   IN   INSURANCE 

made  diagrams  of  the  towns  they  visited  and  marked 
upon  them  the  risks  of  the  company.  Originating  in  the 
iEtna's  western  office,  but  antedating  this  period  a  little, 
was  the  business  of  making  maps.  On  the  first  of  May, 
1856,  William  H.  Martin,  a  civil  engineer,  was  employed 
by  the  iEtna  to  make  maps  of  important  points  where 
the  company  was  transacting  business,  and  in  June  of 
the  same  year  the  first  map  was  copyrighted  in  the  name 
of  the  ^tna  Insurance  Company.  One  of  Mr.  Martin's 
assistants,  D.  A.  Sanborn,  saw  the  possibilities  of  the  map 
business.  He  removed  to  New  York  and  tried  to  induce 
Mr.  Martin  to  join  him,  but  the  latter  preferred  to  remain 
with  the  iEtna  and  did  so  until  his  death  in  April,  1903. 
These  maps  made  it  so  much  easier  to  transact  the  busi- 
ness of  the  company  that  a  considerable  demand  was  created 
for  them,  resulting  in  the  almost  universal  use  of  what  are 
known  as  the  fire  maps.  The  large  towns  and  cities  are 
mapped,  and  the  map  company  keeps  them  up  to  date, 
supplying  the  insurance  company  with  all  the  changes. 
The  map  department  of  the  modern  fire  insurance  com- 
pany is  one  of  its  most  important  adjuncts.  It  enables 
the  daily  report  examiner  or  manager  in  the  office  to  know 
accurately  about  the  character  of  the  risk  he  is  to  pass 
upon.  The  amount  which  the  company  has  in  any  block 
is  marked  on  the  map,  so  that  at  a  glance  it  is  possible 
for  the  company  to  decide  whether  it  desires  to  increase 
its  holdings.  Before  the  use  of  maps,  however,  all  of  the 
risks  of  the  company  were  marked,  and  a  record  of  the 
company's  holdings  were  kept  on  what  are  known  as  block 
sheets.  These  enabled  the  company  to  know  the  amount 
it  had  at  risk,  though  they  did  not  furnish  information 
as  to  environment  such  as  the  modern  fire  map  gives  at  a 
glance.  These  three  devices  gave  the  business  a  wonder- 
ful impetus.  An  old  underwriter,  for  example,  states 
that  one  of  the  great  advantages  secured  through  the  use 
of  the  daily  report  was  that  the  frequency  of  the  knowledge 
prevented  stealing  on  the  part  of  agents  through  writing 


FIRE  INSURANCE  IN  THE  UNITED  STATES      33 

short-term  insurances  which  were  not  reported.  This 
underwriter  estimated  that  his  office  saved  at  least  12  per 
cent,  through  the  increased  frequency  of  knowledge  con- 
cerning the  writings  of  the  local  agents. 

Belonging  to  this  third  period,  but  really  beginning  with 
the  closing  years  of  the  second  period,  was  the  opening 
of  the  Pacific  coast  to  the  business  of  fire  insurance.  The 
Phoenix,  of  Hartford,  was  the  pioneer.  The  officers  of 
the  Phoenix  visited  the  Pacific  coast,  looked  over  the 
ground  and  on  May  1,  1862,  established  a  Pacific  coast 
department  in  charge  of  R.  H,  Magill.  At  this  time,  all 
the  fire  insurance  business  of  the  coast  was  written  at 
San  Francisco  through  correspondents.  The  company 
had  a  correspondent  in  a  town,  information  concerning 
the  risk  and  the  amount  desired  was  sent  in,  the  policy 
issued  and  forwarded.  This  was  rather  cumbersome  and 
slow,  so  in  1863  Mr.  Magill  began  the  establishment  of 
local  agencies  in  the  towns  of  the  coast.  His  success  was 
so  great  that  other  companies  were  obliged  to  follow  his 
example. 

The  National  Board  of  Fire  Underwriters  was  just 
beginning  to  wrestle  with  some  of  its  difficult  problems 
when  along  came  the  Chicago  fire  and  wiped  out  many 
of  the  insurance  companies  of  the  country.  Many  of  the 
purely  local  companies  were  caught  through  the  surplus 
lines  they  wrote  or  the  reinsurances  wliich  they  secured 
from  the  agency  companies.  The  companies  had  only 
partially  recovered  when  along  came  the  Boston  fire  and 
completed  the  wrecking  of  a  large  number  of  the  fire  com- 
panies which  had  been  struggling  along  in  a  crippled  con- 
dition during  the  year  intervening  between  the  two  fires. 
The  National  Board  now  promptly  took  hold  of  the  situa- 
tion, and  rates  were  sharply  advanced.  State  boards  and 
local  boards  in  smaller  towns  were  organized  and  an  elab- 
orate system  of  control  was  worked  out;  in  fact,  in  the 
long  run,  it  was  too  elaborate.  These  fires  imposed  upon 
the  National  Board  not  only  revision  of  rates,  but  also 


34  YALE  READINGS  IN  INSURANCE 

problems  of  construction.  Chicago  had  been  a  wooden 
city,  Boston  had  also  much  wood  in  its  construction,  and 
the  dangerous  mansard  roof  was  then  in  the  heyday  of 
its  popularity.  A  determined  crusade  was  therefore  made 
against  these  forms  of  construction,  and  the  preparation 
of  a  basis  or  schedule  for  rating  was  attempted  at  this  time. 
There  was  also  a  large  influx  of  new  companies  as  a  result 
of  the  increased  rates  following  the  Boston  and  Chicago 
fires. 

In  1874  the  companies  doing  business  in  New  York 
were  compelled  to  report  their  unearned  premium  lia- 
bility, and  to  this  period  also  belongs  the  adoption  of  the 
safety  fund  law  in  New  York.  The  increase  in  the  num- 
ber of  companies,  and  the  profit  which  attended  the  busi- 
ness because  of  the  increased  rates,  induced  a  period  of 
demoralization  which  extended  from  1874  to  1880,  during 
which  numerous  irresponsible  companies  were  formed. 
To  make  matters  worse,  the  National  Board,  in  April,  1877, 
stopped  making  rates  and  relegated  this  subject  back  to 
the  local  boards,  with  the  result  that  the  high  rates  could 
no  longer  be  maintained.  Every  company  was  a  law  unto 
itself;  there  was  no  profit,  and  it  was  apparently  a  struggle 
for  the  survival  of  the  fittest.  The  fire  insurance  business, 
however,  had  become  so  large  that  this  demoralization 
could  not  be  permitted  to  continue.  Some  method  of 
cooperation  had  to  be  found,  and  this  begins  the  last 
period  of  this  study.  It  should  be  noticed  here  that  fire 
insurance  had  been  going  through  an  evolution,  and  step 
by  step  the  scope  had  become  broader  and  better  cal- 
culated to  assist  the  business  development  of  the  country. 
New  ideas  and  new  doctrines  had  come  to  the  front  as 
necessity  compelled.  The  rating  by  the  National  Board, 
through  its  state  boards  and  local  boards,  had  been  so 
much  of  an  improvement  over  the  former  conditions  that 
things  could  not  be  permitted  to  go  backward.  Some- 
thing new,  however,  had  to  be  devised. 

In  the  eighties,  the  field  man  proved  the  way  out.     He 


FIRE  INSURANCE  IN  THE  UNITED  STATES      35 

had  been  doing  his  work  quietly  and  unobtrusively,  and 
the  main  difficulty  had  been  lack  of  numl3ers  and  too  large 
territory  to  oversee.  The  abdication  by  the  National 
Board  of  its  rate-making  powers  threw  a  large  amount 
of  additional  work  upon  his  shoulders.  Accordingly,  in 
1872,  the  New  York  State  Association  of  Supervising  and 
Adjusting  Agents  was  organized;  in  1881,  the  Underwriters' 
Association  of  the  Middle  Department;  in  1883,  the  Under- 
writers' Association  of  New  York  State  and  the  New  Eng- 
land Insurance  Exchange;  in  1882,  the  Illinois  State  Board 
of  Fire  Underwriters  —  all  of  which  may  be  considered  as 
pioneers  in  the  attempts  at  cooperation.  Into  the  hands 
of  these  associations  the  detailed  work  of  rate-making  was 
given.  Upon  them  also  fell  the  work  of  readjusting  the 
local  boards,  so  that  the  chain  of  cooperation  might  be 
complete.  The  local  agents,  then  the  special  agent,  and 
the  problems  which  they  could  not  individually  adjust, 
were  sent  to  the  field  men's  organization  and  the  residue 
of  problems  was  sent  up  to  the  organizations  of  the  com- 
panies. Two  of  these  organizations  were  formed  about 
this  time,  namely,  the  Western  Union  in  1879,  and  the 
Southeastern  TarifT  Association  in  1882,  while  the  Fire 
Underwriters  of  the  Pacific  had  been  in  existence  since 
1870.  The  Western  Union  and  the  Eastern  Union  are 
now  the  managing  underwriter's  medium  of  cooperation 
in  the  territory  east  of  the  Rocky  Mountains,  while  the 
Pacific  coast  is  under  another  organization.  An  outgrowth 
of  the  National  Board  should  be  mentioned  here,  namely, 
the  Fire  Underwriters'  Association  of  the  Northwest. 
When  the  National  Board  gave  up  its  rate-making  func- 
tion the  Northwest  Association  became  simply  a  social 
and  educational  association  of  the  western  field  men,  and 
has  increased  from  year  to  year  in  power  and  influence, 
until  it  is  the  leading  social  and  educational  association 
of  the  field  men  in  this  country. 

One  of  the  first  practical  problems  of  this  period  was 
that  of  policy  forms.     There  had  gradually  grown  up  a 


36  YALE  READINGS  IN  INSURANCE 

fairly  satisfactory  policy  in  some  sections,  but  it  was 
purely  a  local  policy.  Every  city  and  every  section  used 
one  that  was  a  little  different.  Then  again,  the  companies 
did  not  cling  as  closely  to  one  form  as  they  might  and,  as  a 
result,  in  adjustments  there  were  conflicting  forms.  In 
reality  it  was  difficult  under  those  various  forms  to  deter- 
mine the  liability  of  the  corporation.  The  National  Board 
adopted  a  standard  policy,  but  it  did  not  make  much 
progress,  and  finally,  in  1873,  Massachusetts  provided  for 
A,  standard  policy,  which  was  made  obligatory  in  1880 
upon  all  companies  operating  in  that  state.  In  1886  New 
York  adopted  a  standard  form  of  policy  which  became 
ly  mandatory  in  January  of  the  following  year,  and  which 
is  now  in  use  in  all  the  states  where  there  are  not  special 
forms  provided  by  statute. 

The  next  step  in  the  evolution  was  in  the  matter  of 
inspections.  The  mill  mutuals,  as  certain  New  England 
companies  are  styled,  were  organized  under  the  theory 
that  it  was  cheaper  to  prevent  fires  than  to  pay  losses. 
Therefore  they  developed  a  very  thorough  system  of 
inspection  and  the  use  of  fire  preventive  appliances. 
Chief  among  these  fire  preventive  appliances  are  what 
are  known  as  automatic  sprinklers.  The  early  sprinklers 
were  not  particularly  satisfactory,  but  out  of  the  evolution 
of  experience  came  the  modern  heads,  most  widely  known 
of  which  is  the  Grinnell.  The  stock  companies  found  it 
necessary  to  meet  the  competition  of  these  mill  mutuals, 
and  so  there  arose  what  is  known  as  the  Factory  Insurance 
Association,  organized  in  1890.  This  was  followed  soon 
after  by  a  similar  organization  in  the  West,  and  these 
organizations  make  a  special  feature  of  inspecting  property 
and  writing  large  policies  upon  such  protected  and  in- 
spected risks.  In  line  with  this  idea  is  the  spread  of  fire 
preventive  methods.  This  fire  prevention  idea  includes 
not  only  sprinklers,  but  construction,  water  supply, 
electrical  wiring,  and  numerous  other  provisions  for  the 
prevention  of  fire.    The  National  Fire  Prevention  Asso- 


FIRE  INSURANCE  IN  THE  UNITED  STATES      37 

ciation,  organized  in  1896,  has  done  more  to  lessen  the 
number  of  fires  by  means  of  proper  construction  than  all 
other  agencies  put  together.  It  has  enlisted  science, 
architecture,  and  chemistry  in  the  prevention  of  fires. 

The  rating  problem  has  l3ecn  and  still  is  one  of  much 
difficulty.  It  is  hard  to  build  up  a  system  of  rates  for 
fire  risks  which  shall  be  equitable  and  easily  compre- 
hended by  property  owners.  The  physical  character  of 
risks  varies  so,  and  there  is  so  little  harmony  in  the  matter 
of  water  supply  and  fire  protective  appliances  in  the 
different  cities,  that  the  rating  problem  becomes  and  is 
many  sided.  The  first  systematic  plan  was  devised  by  a 
committee  of  wdiich  F.  C.  Moore  was  chairman,  and  the 
schedule,  known  as  the  Universal  Mercantile  Schedule,  was 
promulgated  in  1893.  It  is  the  main  basis  for  fire  insur- 
ance rates  at  the  present  time.  In  the  late  nineties,  A.  F. 
Dean,  of  Chicago,  who  had  been  making  a  careful  study 
of  rates,  prepared  a  tariff  known  as  a  "Mercantile  Tariff 
and  Exposure  Formula  for  the  Measurement  of  Fire 
Hazards."  It  is  based  upon  a  diffierent  theory  from  the 
Moore  schedule.  It  is  more  scientific  and  flexi])le  and  has 
come  into  quite  general  use  in  the  Middle  West,  and  bids 
fair,  as  regards  principles  at  least,  to  become  the  basis  of 
fire  insurance  rate-making. 

Legislation  affecting  fire  insurance  has  grown  from 
small  beginnings  to  one  of  large  proportions.  Legislation 
touches  the  fire  insurance  business  at  many  points.  In 
1885  the  State  of  New  Hampshire  enacted  what  is  known 
as  the  valued-policy  law.  This  law  prevented  any  ques- 
tioning of  the  value  of  the  l)uildings  insured  and  the  com- 
panies promptly  withdrc^w  from  the  state  for  several 
years.  Laws  similar  to  this  have  been  enacted  in  a  num- 
ber of  states,  with  the  result  of  increasing  the  cost  of 
insurance  to  the  buyer.  Then  adverse  legislation  has  also 
attempted  to  prevent  coo])eration  betwcH'u  the  companies 
through  the  enactment  of  anti-compact  laws  and  the  pro- 
hibition of  certain  clauses  in  policies.    The  men  who  levied 

208197 


38  YALE  READINGS  IN  INSURANCE 

taxes  began  soon  after  the  war  to  realize  that  the  insurance 
business  was  a  good  field  for  their  activities,  so  they  began 
to  tax  premiums,  impose  fees  for  filing  statements  and 
devise  other  taxes  which  aggregated  a  large  amount  and 
have  always  been  a  very  material  burden.  As  the  needs 
of  the  states  have  increased,  so  the  burdens  imposed  upon 
the  companies  have  increased.  In  the  later  development 
of  fire  insurance,  legislation  and  taxes  have  been  among 
the  most  serious  of  the  problems  to  be  faced.  Despite 
adverse  legislation  and  the  disintegrating  tendencies  of 
prosperity,  cooperation  has  progressed.  The  companies 
have  more  and  more  found  themselves  unable  to  stand 
alone.  There  were  so  many  points  where  their  interests 
touched,  so  many  ways  in  which  they  could  help  each 
other,  that  cooperation  has  become  a  powerful  factor  in 
the  business. 

Another  feature  of  this  period  was  the  foundation  of 
organizations  for  adjustment  of  losses  whereby  a  companj^, 
when  it  was  not  convenient  to  employ  the  special  agents, 
could  secure  the  service  of  trained  and  expert  adjusters. 
These  organizations  do  good  work  and  fill  a  want  long  felt. 
This  was  followed  in  due  time  by  a  plan  for  minimizing 
the  expense  and  increasing  the  efficiency  of  adjustments. 
This  originated  in  New  York  and  makes  for  progress  in 
the  matter  of  systematic  work.  Still  another  advance 
has  been  that  of  salvage  wrecking  or  the  handling  and 
sale  of  damaged  stocks,  an  advance  which  has  manifested 
itself  both  in  the  form  of  company  organizations  and  pri- 
vate corporations. 

Despite  the  many  lines  of  progress,  however,  there  has 
been  from  time  to  time  the  recurring  mutual  wave  and  the 
Lloyds  craze.  The  latest  of  these  waves,  that  of  Lloyds, 
has  only  recently  receded.  It  followed  a  high  tide  of 
mutual  experiment,  neither  of  these  waves  evidencing 
any  advance  in  the  direction  of  sound  underwriting. 
After  the  Lloyds  wave  began  to  recede,  legislation  was 
invoked,  and  only  last  winter  the  New  York  legislature 


FIRE  INSURANCE  IN  THE  UNITED  STATES       39 

enacted  legislation  against  the  vanishing  Lloyds  form  of 
underwriting.  Duplication  of  company  power  was  also 
attempted  in  1897  and  1898  in  the  form  of  underwriters' 
agencies  or  the  attempt  to  form  two  companies  out  of  one. 
They  created  some  discussion  and  friction,  but  only  a  few 
remain  and  it  is  questionable  how  successful  they  are. 
The  latest  phase  of  the  business  of  insurance  to  be  noted 
is  that  of  the  organization  of  the  local  agents  into 
cooperative  relations.  The  agents,  like  the  companies, 
have  found  that  they  have  many  interests  in  common,  and 
that  one  agent  standing  by  himself  does  not  amount  to 
more  than  one  company  standing  by  itself.  Having  come 
to  the  conclusion  that  certain  things  of  vital  interest  to 
them  might  be  improved,  they  have  formed  a  national 
association  as  well  as  state  associations,  whose  work,  as 
a  whole,  has  been  a  benefit  to  the  business. 

From  this  historical  study  the  reader  will,  no  doubt, 
have  noted  the  very  great  advance  made  in  fire  under- 
writing since  the  period  when  trees  were  not  permitted  in 
front  of  insured  property.  The  evolution  has  been  frag- 
mentary, it  is  true,  and  not  altogether  in  an  orderly  man- 
ner, but  it  has  been  a  steady  evolution  nevertheless. 
Starting  in  ignorance  of  method,  only  having  an  object 
in  view,  the  business  of  fire  insurance  has  gradually  reached 
out,  and  has  more  and  more  found  a  sure  footing.  The 
managers  have  noted  where  the  relations  of  the  business 
demanded  changes;  conflagrations  have  brought  home 
to  them  certain  truths;  and  when  a  form  of  organization  or 
a  method  of  doing  buisness  has  broken  down,  men  have 
been  found  to  come  forward  to  try  something  new,  gen- 
erally an  advance  over  that  which  had  been  discarded. 
These  men  soon  realized  that  the  sole  business  of  fire 
insurance  was  not  simply  to  pay  losses.  The  evolution 
has  naturally  been  gradual  up  to  the  point  where  the 
skilled  and  capable  underwriter  recognizes  that  his  busi- 
ness, being  a  part  of  public  progress,  should  subserve  the 
public  interest  best  by  preventing  fires.    Therefore,  he 


40  YALE  READINGS  IN  INSURANCE 

has  made  concessions  in  rates  for  the  men  who  will  take 
the  extra  precautions  in  the  line  of  building  and  fire  pre- 
vention. His  horizon  has  broadened  and  he  sees  that  fire 
fighting  and  construction  are  closely  related  in  the  pros- 
perity of  his  business.  He  has  learned,  but  slowly  it  is 
true,  but  nevertheless  he  has  learned,  that  what  the  public 
desires  above  everything  else  is  certainty,  and  while  he 
has  grumbled  many  times  at  the  intervention  of  the  state 
in  his  business,  to-day  he  recognizes  that  intervention, 
as  a  rule,  makes  for  the  certainty  which  both  he  and  the 
assured  desires.  There  are  many  incidents  and  events  in 
the  century  and  a  half  of  fire  insurance  in  this  country 
which  might  have  been  wisely  different,  but  taken  as  a 
whole,  it  has  been  a  sound  and  progressive  development, 
comparing  favorably  with  that  of  any  other  Une  of  business. 


CHAPTER  III 

FUNCTION   OF   FIRE    INSURANCE  ^ 

The  term  insurance  has  been  used  in  describing  the 
fund  accumulated  to  meet  uncertain  losses.  It  is  evident 
that  in  a  static  state  all  producers  who  are  exposed  to 
risk  must  accumulate  such  funds.  While  it  is  uncertain 
whether  the  accumulation  of  any  individual  producer  will 
be  enough  to  meet  the  loss  he  suffers,  that  of  the  entire 
body  of  producers  in  any  industry  must  be  large  enough 
to  cover  the  losses  of  the  group  as  a  whole.  Otherwise 
there  would  be  in  the  long  run  a  great  diminution  in  the 
amount  of  capital  in  hazardous  industries,  and  a  serious 
disturbance  of  the  static  adjustment.  Such  a  phenomenon 
is  inconsistent  with  the  notion  of  the  static  state.  A 
fruit-dealer  who  at  irregular  intervals  suffers  loss  through 
decay  must  add  to  the  price  of  his  fruit  enough  to  cover 
such  uncertain  loss.  A  ship-owner  has  to  increase  his 
freight  rates  more  or  less,  if  his  ships  occasionally  lie  idle 
in  port.  In  this  sense,  then,  every  producer,  in  the  absence 
of  all  opportunity  of  transferring  his  risk,  must  insure 
himself.  Such  insurance  would  be  defined  as  the  accu- 
mulation of  a  fund  to  meet  uncertain  losses.  From  the 
point  of  view  of  economic  theory,  as  has  already  been 
shown,  the  insurance  fund  includes  only  that  part  of  the 
accumulation  that  is  intended  to  cover  the  uncertain  part 
of  the  loss;  it  is  that  part  only  whose  amount  is  affected 
by  the  influence  of  uncertainty. 

This  individualistic  method  of  pi'oviding  for  uncertain 

*  By  Allan  H.  Willett,  Instructor  in  Economics  in  tho  Carnegie 
Technical  Schools,  Pittslnirg.  Roprintcd  from  pages  387-408,  Vol. 
XIV  of  the  Columbia  College  Studies. 

41 


42  YALE  READINGS  IN  INSURANCE 

loss  is  spoken  of  sometimes  as  lateJit  insurance/  and  some- 
times as  5e//-insurance.  The  latter  term  is  usually  applied 
to  such  conduct  on  the  part  of  large  concerns  with  many 
risks  of  kinds  commonly  transferred  to  regular  insurance 
companies;  the  former  is  more  frequently  used  of  the 
preparation  to  meet  risks  of  kinds  which  insurance  com- 
panies do  not  assume.  While  it  may  be  impossible  to 
avoid  the  use  of  the  term  insurance  in  referring  to  these 
forms  of  economic  activity,  it  is  evident  that  in  common 
usage  the  word  is  ordinarily  employed  in  a  different  sense. 
It  is  used  to  denote  the  transfer  of  risk.  Any  person  who 
guarantees  another  against  accidental  loss  of  any  kind  is 
said  to  insure  him.  It  is  in  this  sense  that  the  capitalist- 
entrepreneur  insures  the  capital  of  those  from  whom  he 
borrows.  This  use  of  the  term  insurance,  however,  like 
the  preceding,  fails  to  bring  out  its  real  significance.  To 
apply  it  to  all  individualistic  preparation  for  uncertain 
loss  extends  it  too  far  in  one  direction;  to  apply  it  to  every 
transfer  of  risk  extends  it  too  far  in  another.  To  form  a 
complete  conception  of  insurance,  it  is  necessary  to  add 
to  the  notions  of  accumulation  of  capital  and  transfer  of 
risks  the  idea  of  the  combination  of  the  risks  of  many 
individuals  in  a  group.  We  should  define  insurance,  tlien, 
as  that  social  device  for  making  accumulations  to  meet 
uncertain  losses  of  capital  which  is  carried  out  through 
the  transfer  of  the  risks  of  many  individuals  to  one  person 
or  to  a  group  of  persons.  Wlierever  there  is  accumula- 
tion for  uncertain  losses,  or  wherever  there  is  a  transfer 
of  risk,  there  is  one  element  of  insurance;  only  where 
these  are  joined  with  the  combination  of  risks  in  a  group 
is  the  insurance  complete. 

*  "Partout  ou  il  y  a  un  risque  k  courir,  une  assurance  latente  pro- 
tege la  valeur  ou  meme  le  gain  menac6  par  ce  risque.  On  la  retrouve 
dans  la  commission  prelev^e  par  le  banquier,  dans  les  prix  sur^lev^s 
du  marchand  qui  livre  k  credit,  dans  les  taux  parfois  usuraires  de 
certains  prets."  —  Michel  Lacombe,  "Assurances,"  Say  and  Chailley's 
Nouveau  Didionnaire  d' Economic  Politique,  Vol.  I,  p.  101. 


FUNCTION  OF  FIRE  INSURANCE  43 

In  many  respects  the  increase  in  the  numlDer  of  distinct 
risks  that  an  individual  producer  carries  is  analogous  to 
the  combination  of  the  risks  of  many  individuals.  Other 
things  being  equal,  a  ship-owner  who  has  a  hundred  ships, 
and  who  carries  his  own  insurance,  is  in  the  same  economic 
condition  as  any  one  of  a  hundred  ship-owners,  each  pos- 
sessing one  ship,  who  have  combined  their  risks  in  a  group 
through  a  system  of  insurance.  The  gain  from  the  com- 
bination of  risks  is  due  solely  to  the  increase  in  the  number 
of  risks  in  the  group ;  and  if  that  increase  takes  place  through 
the  gi'owth  of  a  single  industry,  the  same  advantage  is 
obtained.  It  is  partly  because  of  this  fact  that  large  in- 
dustrial concerns  are  able  to  carry  their  own  insurance. 
With  the  increase  in  the  number  of  distinct  risks  to  which 
they  are  exposed,  the  cost  of  carrying  the  risk  relatively 
diminishes.  This  gain  is  one  of  the  influences  that  foster 
the  gi'owth  of  large  industrial  organizations.  In  the 
absence  of  all  other  conditions  affecting  their  size,  it  would 
lead  in  the  end  to  the  concentration  of  each  line  of  indus- 
try, or  even  of  all  lines,  in  the  hands  of  a  single  organiza- 
tion; and  in  the  presence  of  these  other  conditions,  the 
size  that  would  finally  be  found  most  advantageous  would 
be  affected  by  the  increase  in  the  number  of  risks. 

It  is  time  to  point  out  the  exact  nature  of  the  gain  under 
consideration.  It  is  evident  that  it  will  not  be  due  to 
any  reduction  in  the  actual  amount  of  positive  loss.  Wliat 
the  increase  in  the  number  of  separate  risks  in  the  group 
does  bring  about  is  a  reduction  of  the  uncertainty  for 
the  group  as  a  whole,  a  substitution  of  certain  loss  for 
imcertain  loss.  As  is  well  known,  the  probable  varia- 
tion of  the  actual  loss  in  any  year  from  the  average  for 
a  series  of  years  increases  only  as  the  squar(!  root  of  the 
number  of  separate  chances  of  loss  included  in  a  group. 
Now,  as  we  have  seen,  it  is  through  the  accumulation 
for  meeting  uncertain  loss  that  the  special  reward  for 
risk-taking  is  obtained.  Competition  will  not  cut  the 
accumulation    for    this    purpose    down    to    the    average 


44  YALE   READINGS  IN   INSURANCE 

amount  of  loss;  it  leaves  a  margin  of  safety.  It  is  evi- 
dent, therefore,  that  anything  that  diminishes  the  degree 
of  uncertainty  reduces  the  cost  of  risk  to  society.  As 
the  uncertainty  diminishes,  the  accumulation  to  meet  the 
uncertain  loss  is  brought  nearer  to  the  probable  loss  as 
estimated  by  the  law  of  averages.  If  all  the  uncertainty 
could  be  annihilated,  the  accumulation  would  be  limited 
to  the  exact  amount  of  the  foreseen  loss,  as  in  the  case  of 
any  other  fixed  element  in  the  cost  of  production. 

The  application  of  this  principle  to  the  institution  of 
insurance  is  evident  at  a  glance.  The  risk  that  an  insur- 
ance company  carries  is  far  less  than  the  sum  of  the  risks 
of  the  insured,'  and  as  the  size  of  the  company  increases 
the  disproportion  becomes  greater.  It  is  primarily  through 
this  reduction  of  uncertainty  that  a  static  society  would 
be  benefited  by  the  existence  of  insurance.  The  cost  of 
commodities  would  be  reduced  through  the  diminution  of 
that  part  of  the  expense  of  producing  them  that  is  involved 
in  the  necessity  of  paying  for  the  assumption  of  risk.  The 
nature  of  this  gain  may  be  made  clear  by  a  simple  illus- 
tration. 

Let  us  assume  that  there  are  10,000  capitalists  of  the 
same  reluctance  to  incur  risk,  each  owning  a  house  valued 
at  $5000;  that  all  the  houses  are  exposed  to  the  same 
danger  of  destruction  by  fire;  that  the  average  annual 
loss  for  a  period  of  years  has  been  50,  and  the  average 
variation  20;  and  that  the  rate  of  interest  in  safe  invest- 
ments is  3  per  cent.  If  each  owner  makes  an  allowance 
of  3  per  cent,  a  year  for  the  amortization  fund,  what  annual 
rental  will  he  demand  for  his  house? 

The  uncertainty  to  which  each  investor  is  exposed  is 
the  resultant  of  two  factors,  the  average  loss  and  the  prob- 

1  "  The  aggregate  danger  is  less  than  the  sum  of  the  individual 
dangers,  for  the  reason  that  it  is  more  certain,  and  that  uncertainty 
of  itself  is  an  element  of  danger."  William  Roscher,  Principles  of 
Political  Economy.  Translated  by  J.  J.  Lalor.  New  York,  1878, 
Vol.  II,  p.  261. 


FUNCTION  OF  FIRE  INSURANCE  45 

able  variation.  What  would  be  the  reluctance  of  an  in- 
vestor to  incur  the  risk  in  the  case  assumed,  and  what 
reward  would  be  necessary  to  overcome  the  reluctance, 
are  empirical  facts  that  we  have  no  means  of  discovering. 
It  is  a  conservative  estimate  that  on  account  of  the  risk 
each  capitalist  will  demand  an  extra  1  per  cent,  on  his 
investment.  The  annual  rent  will  then  be  at  the  rate  of 
7  per  cent.,  that  is,  $350  for  each  house.  At  the  end  of  a 
decade,  if  the  favorable  and  unfavorable  years  just  offset 
one  another,  the  group  will  have  suffered  a  loss  of  500 
houses,  valued  at  $2,500,000.  This  gives  an  average 
annual  loss  of  $25  for  each  of  the  10,000  investors.  Mean- 
time each  of  them  has  received  $50  a  year  on  account  of 
the  risk.  In  the  group  as  a  whole  the  destroyed  capital 
has  been  replaced,  and  each  investor  has  received  a  net 
reward  of  $25.  The  hirer  of  the  house,  who  has  had  to 
pay  this  additional  rent,  is  not  at  all  concerned  with  the 
way  in  which  the  income  has  been  distributed  among  the 
different  owners.  Some  of  these  have  suffered  losses  which 
the  $50  a  year  was  not  enough  to  cover;  others  have  escaped 
loss,  and  the  entire  $50  represents  a  net  gain  for  them. 
Each  consumer,  in  this  case  each  house-renter,  has  had 
to  pay  $25  a  year  more  than  he  would  have  had  to  pay 
if  it  had  not  been  for  the  uncertainty. 

Now  let  us  examine  the  situation  of  the  same  persons 
after  a  system  of  insurance  has  been  introduced.  We  will 
leave  out  of  consideration  the  incidental  expense  of  the 
insurance  itself,  and  for  the  sake  of  simplicity  it  will  be 
assumed  that  the  reluctance  of  the  insurer  to  assume 
risk  is  the  same  as  that  of  the  house-owners,  and  that  the 
fact  that  the  houses  are  insured  has  no  effect  upon  the 
probability  of  loss.  What  is  the  uncertainty  to  which 
the  insurer  is  exposed  when  he  is  carrying  the  risk  of  the 
entire  group,  and  what  reward  can  he  obtain  for  assuming 
it? 

As  the  average  variation  of  the  annual  loss  has  been  20, 
we  may  assume  that  a  minimum  loss  of  25  houses  for  the 


46  YALE  READINGS  IN  INSURANCE 

group  is  certain  to  occur  each  year.  The  insurer,  then, 
has  to  face  a  certain  loss  of  25  houses  a  year,  and  a  prob- 
able loss,  as  determined  by  past  experience,  of  25  more. 
For  the  former,  the  competition  of  other  insurers  will  pre- 
vent him  from  obtaining  more  than  enough  to  replace  the 
loss.  That  will  be  $125,000  for  the  group,  or  $12.50  for 
each  house.  For  the  uncertain  loss  we  will  assume  that 
he  will  be  able  to  obtain  a  return  of  twice  the  probable 
amount  of  loss,  just  as  the  single  investor  did,  though  there 
are  reasons  why  he  would  probably  demand  rather  less. 
That  will  make  this  part  of  his  income  $250,000  for  the 
group,  or  $25  for  each  house.  Each  house-owner,  there- 
fore, will  have  to  pay  the  insurer  $37.50  a  year,  and  their 
competition  with  one  another  will  prevent  any  one  of  them 
from  obtaining  more  than  that  from  the  person  to  whom 
he  lets  the  house.  The  entire  rent  will  now  be  $337.50 
a  year.  Each  consumer  saves  $12.50  a  year,  and  each 
capitalist  is  still  rewarded  at  the  same  rate  as  before  for 
carrying  risk.  If  these  10,000  houses  had  been  joined 
with  a  large  number  of  others,  so  that  there  were,  let  us 
say,  1,000,000  in  the  group,  a  similar  calculation  would 
show  that  the  cost  of  the  risk  to  each  hirer  of  a  house  would 
be  reduced  to  $26.25  per  annum,  or  only  $1.25  more  than 
enough  to  cover  the  actual  loss  in  a  series  of  years. 

That  this  gain  is  in  no  way  dependent  on  the  combina- 
tion of  the  risks  of  different  investors  in  one  group,  and 
that  it  could  equally  well  be  obtained  by  a  single  concern 
with  an  increasing  number  of  risks,  is  manifest.  It  is  equally 
manifest  that  it  would  be  advantageous  for  a  person  with 
a  large  number  of  risks  to  join  them  with  as  many  others 
of  the  same  kind  as  possible.  While  so-called  self-insur- 
ance becomes  cheaper  as  the  number  of  risks  increases,  it 
would  never  be  as  cheap  as  regular  insurance  if  the  insur- 
ance business  were  rightly  managed.  If  it  is  cheaper  for 
a  concern  to  carry  its  own  risk  than  to  pay  premiums  to 
an  insurance  company,  it  shows  either  that  the  company 
considers  the  risk  higher  than  the  concern  thinks  is  right. 


FUNCTION  OF  FIRE  INSURANCE  47 

or  that  the  insurance  business  is  so  expensively  managed 
that  the  cost  of  the  management  more  than  offsets  the  gain 
from  the  increase  in  the  number  of  risks.  The  prevalence 
of  the  custom  of  self-insurance  against  risks  such  as  the 
regular  insurance  companies  assume  is  a  serious  reflection 
on  the  management  of  the  companies. 

The  effect  of  the  principle  that  we  are  considering  on 
the  size  of  insurance  companies  is  the  same  as  that  already 
noted  in  speaking  of  independent  industrial  organizations. 
It  is  a  force  working  towards  large  companies.  The  larger 
an  insurance  company  is,  the  cheaper  it  can  afTord  to  give 
insurance.  It  might  be  impracticable,  but  it  would  not 
be  economically  unjustifiable,  to  require  small  companies 
to  carry  higher  reserves  in  proportion  to  the  amount  in- 
sured than  large  companies  are  compelled  to  carry.  In 
the  absence  of  conflicting  influences  each  branch  of  insur- 
ance would  finally  be  concentrated  in  the  hands  of  a  single 
company.  Nor  is  there  any  reason  why  the  process  of 
centralization  should  stop  here.  There  is  the  same  eco- 
nomic advantage  in  combining  risks  of  entirely  different 
kinds,  provided  they  are  correctly  estimated,  as  there  is 
in  coml^ining  risks  of  the  same  kind.  The  difficulties  in 
the  way  of  such  general  combinations  are  all  of  a  practical 
nature.  Whatever  may  be  said  on  the  ground  of  expedi- 
ency for  the  laws  passed  by  some  of  our  states  restricting 
the  freedom  of  insurance  companies  in  the  matter  of  assum- 
ing different  kinds  of  risks,  economic  theory  affords  no 
justification  for  such  policy.  The  more  risks  the  cheaper 
the  insurance,  is  a  universal  economic  principle.  One 
enormous  company  carrying  all  risks  would  be  the  ideal 
organization  of  insurance 

The  gain  due  to  the  combination  of  risks  and  to  the 
consequent  reduction  of  uncertainty  is  not  the  only  eco- 
nomic benefit  of  insurance.  There  is  another  advantage 
resulting  from  the  transfer  of  risk,  which  is  of  the  same 
kind  as  the  one  previously  noticed  in  speaking  of  the  capital- 
ist-entrepreneur.     It   is  desirable  for  society  that  risks 


48  YALE  READINGS  IN   INSURANCE 

should  be  correctly  estimated.  INIen  differ  much  in  their 
ability  to  judge  them.  The  segregation  of  the  work  of 
estimating  risks  leads  to  a  differentiation  of  capitalists, 
as  a  result  of  which  those  who  are  especially  adapted  to 
that  task  will  be  the  ones  who  will  undertake  it.  More- 
over, their  natural  ability  will  be  further  developed  through 
the  experience  and  training  of  the  work  itself.  On  the 
other  hand  there  are  many  men  capable  of  rendering  good 
service  to  society  in  comparatively  safe  industries,  who  are 
so  constituted  that  the  necessity  of  running  any  great 
chance  of  loss  seriously  diminishes  their  efhciency.  The 
possibility  of  transferring  the  risks  of  their  business  to  others 
for  a  fixed  premium  frees  them  from  the  paralyzing  influ- 
ence of  uncertainty,  and  enables  them  to  make  the  best 
use  of  their  powers  in  other  directions.  The  gain  to  so- 
ciety from  the  transfer  of  risks  is  obtained  partly  through 
the  reduction  in  the  cost  of  carrying  the  risks  when  they 
are  borne  by  those  who  have  the  most  ability  to  estimate 
them  and  the  most  confidence  in  their  own  judgments 
about  them,  and  partly  through  the  increase  in  the  effi- 
ciency of  those  who  are  abnormally  sensitive  to  the  influ- 
ence of  uncertainty. 

The  gains  of  which  we  have  been  speaking  are  partly 
offset  by  the  cost  of  carrying  on  the  insurance  business. 
This  cost  consists  of  interest  on  the  capital  and  wages  for 
the  labor  employed  in  the  actual  performance  of  the  work. 
Wliat  that  cost  ought  to  be,  if  insurance  companies  were 
economically  conducted,  and  how  far  the  actual  cost  ex- 
ceeds that  amount,  we  need  not  stop  to  inquire.  There 
is  a  generous  margin  between  the  price  for  which  a  large 
insurance  campany  can  afford  to  assume  a  risk  and  tlie 
price  which  an  individual  producer  would  demand  for 
carrying  it.  That  this  margin  is  not  exhausted  even  by 
the  extravagant  methods  of  management  that  characterize 
existing  insurance  companies  is  proved  by  the  almost  uni- 
versal prevalence  of  the  custom  of  insurance.  That  it  is 
more  nearly  exhausted  than  it  ought  to  be  is  proved  by 


FUNCTION  OF  FIRE  INSURANCE  49 

the  persistence  of  the  custom  of  self-insurance.  It  must 
not  be  forgotten,  however,  that  insurance  companies  carry- 
on  many  other  forms  of  activity  besides  their  special  work 
of  furnishing  insurance.  Investment  is  a  prominent 
feature  of  so-called  life  insurance,  and  preventive  measures 
of  various  kinds  are  carried  out  by  insurers  of  property. 
Insurers  of  boilers  have  their  inspectors,  fire  insurance 
companies  have  their  patrols,  burglary  insurance  com- 
panies their  private  watchmen,  and  so  on  through  the  list. 
The  part  of  the  premium  which  is  used  in  carrying  out 
these  protective  measures  ought  not  to  be  considered  as 
part  of  the  cost  of  insurance.  It  is  work  that  would  have 
to  be  done  in  some  form  by  individual  producers  or  by 
society,  if  it  were  not  performed  by  the  companies.  The 
fact  that  the  companies  do  it  is  an  indication  that  it  is 
accomplished  more  cheaply  or  more  efficiently  by  them 
than  it  could  be  by  the  insured  themselves.  Another 
legitimate  form  of  expense  that  ought  to  be  recognized 
is  the  cost  of  securing  the  services  of  experts  in  appraising 
property  and  estimating  risks.  This  work  would  also 
have  to  be  performed  in  some  way  by  individual  producers 
if  they  carried  their  own  risks.  It  might  perhaps  be  ac- 
complished more  cheaply  by  them,  but  it  would  certainly 
be  done  more  crudely  and  inaccurately.  The  gain  from 
the  accurate  valuation  of  risks  by  experts  more  than 
counterbalances  the  necessary  increase  in  the  expense. 

There  is  another  form  of  loss  of  serious  proportions  which 
nmst  not  be  left  unnoticed  in  comparing  the  advantages 
and  disadvantages  of  insurance.  It  is  an  essential  feature 
of  a  perfect  system  of  insurance  that  the  occurrence  of  the 
event  for  whose  economic  consequences  compensation  is 
guaranteed  shall  never  be  a  source  of  gain  to  the  insured. 
In  an  ideally  complete  system  the  payment  by  the  in- 
surance company  will  just  equal  the  loss  of  the  insured. 
Now  it  is  a  matter  of  common  observation  that  insurance 
is  often  obtained  in  excess  of  the  actual  value  of  the  prop- 
erty   insured.     As   a   consequence   there  is  considerable 


50  YALE  READINGS  IN   INSURANCE 

wilful  destruction  of  property  for  the  purpose  of  obtaining 
the  insurance.  Moreover,  it  is  doubtful  whether  it  is 
practically  desirable  that  the  amount  of  the  insurance 
equal  the  full  value  of  the  property,  since  no  incentive 
would  be  left  to  the  insured  to  guard  against  the  destruc- 
tion of  his  property.  Over-insurance  leads  to  fraud,  full 
insurance  to  carelessness,  and  even  partial  insurance  to 
some  diminution  of  watchfulness.  Whatever  increase  may 
occur  in  the  amount  of  positive  loss  either  through  fraud 
or  through  carelessness  must  be  deducted  from  the  dim- 
inution in  negative  loss  in  estimating  the  net  gain  which 
insurance  brings  to  society. 

The  economic  significance  of  insurance  in  a  state  is  con- 
nected with  its  influence  in  reducing  the  burden  which  the 
existence  of  risk  imposes  on  society.  So  far  as  the  degree 
of  risk  is  lowered,  and  the  reluctance  to  assume  it  is  dimin- 
ished, so  far  is  society  benefited  by  the  institution  of 
insurance.  How  great  the  gain  is,  even  under  existing 
imperfect  conditions,  it  is  impossible  to  estimate,  since  it 
is  difficult  to  conceive  how  the  large  enterprises  of  the 
present  day  could  be  carried  on  without  the  possibility  of 
transferring  to  insurance  companies  many  of  the  risks  in- 
volved in  them.  It  could  certainly  be  done  only  on  a 
much  larger  margin  of  safety  than  is  now  considered 
necessary. 

The  essential  features  of  economic  insurance  as  we  have 
defined  it  are  the  accumulation  of  capital  to  meet  uncer- 
tain losses,  and  the  transfer  and  combination  of  risks. 
Many  other  conceptions  of  insurance  have  been  held  by 
various  writers  on  the  subject.  Some  originated  in  an 
over-emphasis  of  a  comparatively  unimportant  phase  of 
the  institution,  others  in  a  wrong  interpretation  of  some 
feature  of  it.  As  an  example  of  the  former  kind  may  be 
mentioned  the  conception  of  those  writers  who  find  the 
significance  of  insurance  in  the  diffusion  of  positive  losses 
over  a  large  group  of  persons.^    That  the  insured  in  the 

'  "Consider^e  dans  son  principo  meme,  I'assurance  est  une  associa- 


FUNCTION   OF  FIRE  INSURANCE  51 

long  run  pay  all  the  losses  is  undoubtedly  true,  but  the 
distribution  of  the  losses  is  only  an  indirect  result  of  the 
insurance ;  it  is  neither  the  purpose  of  it  nor  the  immediate 
consequence.  The  purpose  of  securing  insurance  is  to 
avoid  uncertainty.  The  insured  buys  security  by  the  pay- 
ment of  a  fixed  premium,  and  after  he  has  bought  it  his 
condition  is  not  affected  by  the  number  of  losses  which 
the  insurer  may  have  to  make  good.  If  the  number  of 
losses  increases,  the  premium  rate  may  be  raised;  but  in 
all  cases  of  complete  insurance  the  cost  of  it  is  a  definite 
clement  in  the  expense  of  production,  the  amount  of  which 
is  fixed  before  the  occurrence  of  the  losses.  Only  in  the 
case  of  mutual  assessment  companies  is  there  a  direct  dis- 
tribution of  losses  over  a  group.  A  member  of  such  a  com- 
pany is  not  in  the  same  economic  situation  as  one  insured 
for  a  fixed  premium.  He  has  not  transferred  his  risk  and 
purchased  security;  he  has  exchanged  one  risk  for  another, 
usually  a  small  chance  of  a  large  loss  for  a  larger  chance 
of  a  smaller  loss.  Where  there  is  a  mere  diffusion  of  loss 
there  remains  some  degree  of  uncertainty  as  to  the  amount 
of  loss  that  each  member  of  the  group  will  suffer;  where 
there  is  complete  insurance  the  insurer  has  taken  upon 
himself  the  entire  chance  of  loss,  so  far  as  concerns  the 
risks  covered  by  the  insurance.  To  define  insurance, 
then,  as  the  distribution  of  losses  is  to  make  too  prominent 
an  indirect  and  comparatively  unimportant  result  of  it, 

tion  qui  a  pour  objet  de  repartir  entre  tous  ses  membres  les  pertes 
occasionn^es  k  quelques-uns  d 'entre  eux  par  certains  ev^nements 
fortuits,  de  telle  sort  que  chaque  membre  supporte  sa  part  de  rindoni- 
nit6  due  aux  victimes  du  sinistre."  —  Ch.  Dvniiaine,  "Assurances," 
Say's  Dictionnaire  des  Finances,  Vol.  I,  p.  220. 

"  Versicherung  im  wirthscfuiftlichen  Sinne  ist  diejenige  wirtlischaft- 
liche  Einrichtung,  welche  die  nachtheiligen  Folgen  (zukunftigen) 
einzelner,  fiir  den  Betroffenen  zufdlliger,  daher  auch  im  einzelnen  Falle 
ihres  Eintretens  unvorhergesebener  Ereignisse  fiir  das  Vermogen  einer 
Person  dadurch  beseitigt  oder  wenigstens  vermindert  dass  sic  diesel- 
ben  attf  eine  Reihe  von  Fallen  verthcilt,  in  denen  di(>  glciche  Gefahr 
droht,  aber  nirlit  wirklich  ointritt."  —  Adolj)h  Wagner,  "  Versicherunga- 
wesen,"  Schonberg's  Ilandbuch,  4te  Auf,  2  Band  2,  s.  359. 


52  YALE  READINGS  IN  INSURANCE 

and  to  leave  entirely  out  of  the  definition  the  elements  in 
which  its  ecomomic  significance  really  lies. 

The  other  erroneous  conception  of  insui'ance  to  which 
reference  has  been  made  is  even  more  indefensible  than 
the  one  just  noticed.  Instead  of  arising  from  an  over- 
emphasis of  a  comparatively  miimportant  feature  of  the 
institution,  it  is  based  on  an  essentially  false  idea  of  its 
nature.  Because  each  insurance  contract  considered  by 
itself  is  a  contingent  contract,  and  because  the  event  upon 
which  the  payment  by  the  insurer  to  the  insured  depends 
is  uncertain,  many  writers  have  regarded  insurance  as  a 
form  of  gambling.^  But  the  resemblance  is  in  reality  of 
the  most  superficial  kind.  It  is  not  difficult  to  discover 
the  mark  of  distinction  between  the  two  transactions. 
Insurance  involves  the  transfer  of  an  existing  risk  from 
one  person  to  another;  gambling  involves  the  creation  of 
a  new  risk  to  which  neither  party  to  the  transaction  was 
exposed  before  the  contract,  and  to  which  they  are  both 
exposed  after  it.  If  a  man  insures  his  factory,  he  frees 
himself  from  uncertainty,  and  the  other  party  to  the  con- 

»  "  Let  us  now  contrast  the  workings  of  insurance.  In  this  case  also 
the  contract  is  a  wager.  A  house-owner  pays  an  insurance  company 
fifty  dollars,  in  return  for  which  he  is  to  receive  five  thousand  dollars 
in  case  his  house  burns  down  within  a  specified  time;  just  as  he  might 
pay  a  book-maker  fifty  dollars  and  receive  five  thousand  in  case  a  speci- 
fied horse  wins  a  race."  —  Arthur  T.  Hadley,  Economics,  p.  99. 

"Le  contrat  al^atoire  est  une  convention  r^ciproque  dont  les  effets, 
quant  aux  avantages  et  aux  pertes  soit  pour  toutes  les  parties,  soit 
pour  I'une  ou  plusieurs  d'entre  elles,  dependent  d'un  evenement  in- 
certain.  Telles  sont  le  contrat  d 'assurance,  .  .  .  le  jeu  et  le  pari, 
.  .  ."  —  Code  civil  fran^ais.  Art.  1984.  Quoted  in  Charles  Berdez, 
Les  Bases  de  U Assurance  Privee,  p.  56,  note. 

"Wenn  also  der  unorganisierte  Spiel  des  Schicksals  den  Menschen 
in  Gefalir  bringt,  so  begreifen  wir,  dass  das  Mittel,  welches  er  ihm 
entgegensetzt,  ein  organisiertes  Gliickspicl  sein  wird.  Er  erreicht 
dadurch  die  Wirkung,  dass  er  zur  selben  Zeit,  wo  er  von  eineme  Ver- 
lust  betroffen  wird,  durch  das  Gliickspiel  einen  Gewann  erhalt,  der 
gerade  den  Schaden  deckt."  —  R.  Schlink,  Die  Natur  der  Versich- 
erung,  Wurzburg,  1887,  s.  13. 


FUNCTION  OF  FIRE  INSURANCE  53 

tract  assumes  it;  if  he  makes  a  wager  with  another,  his 
own  uncertainty  and  that  of  the  other  person  are  both 
increased  at  the  same  time.  Undoubtedly  in  the  past 
many  transactions  which  wore  the  virtuous  guise  of 
insurance  were  no  better  than  gambling  contracts.  If  a 
person  takes  out  a  policy  on  property  in  which  he  has  no 
insurable  interest,  he  virtually  makes  a  wager  with  the 
insurance  company  that  the  property  will  be  destroyed. 
Such  contracts  are  clearly  against  public  policy,  and  legis- 
lation has  done  much  to  limit  their  number.  The  courts 
on  the  other  hand  have  frequently  given  a  liberal  con- 
struction to  the  phrase  "insurable  interest,"  and  many 
contracts  of  doubtful  legitimacy  are  still  tolerated.  A 
legitimate  insurance  contract,  however,  may  always  be 
distinguished  from  a  gambling  contract  by  the  principle 
pointed  out.  Insurance  is  the  transfer  of  risk,  gambling 
the  creation  of  risk. 

After  a  system  of  insurance  against  any  class  of  risks 
has  been  established,  an  entrepreneur  has  a  choice  between 
three  methods  of  meeting  such  a  risk,  in  an  industry  that 
he  has  decided  to  enter.  He  may  adopt  preventive  meas- 
ures, he  may  obtain  insurance,  or  he  may  carry  the  risk 
and  pay  a  higher  price  for  the  capital  he  borrows.  His 
selection  among  these  different  modes  of  conduct  will 
depend  upon  their  relative  cost.  Expenditure  for  any  one 
of  them  is  to  him  an  item  in  the  cost  of  production,  and 
he  will  naturally  adopt  the  one  that  is  cheapest.  As  a 
matter  of  fact,  in  nearly  all  cases  it  is  necessary  to  com- 
bine the  three  methods.  Preventive  measures  are  adopted 
by  which  the  total  amount  of  risk  is  somewhat  reduced; 
a  part  of  the  remaining  risk  is  transferred  to  insurance 
companies;  the  rest  is  borne  by  the  capital  in  the  industry. 
The  amount  of  the  expenditure  for  each  of  these  purposes 
is  determined  according  to  the  principles  already  estab- 
lished. The  payment  for  the  capital  exposed  to  risk  con- 
tains an  element  of  reward  for  risk-taking,  which  is  large 
in  proportion  to  the  degree  of  risk ;  the  payment  for  insur- 


54  YALE  RE.IDINGS  IN   INSURANCE 

ance  contains  a  relatively  smaller  element  of  the  same  kind ; 
the  payment  for  prevention  contains  none  at  all. 

The  entire  sum  paid  by  the  insured  to  the  insurance 
company  is  called  the  insurance  premium.  As  the  com- 
panies carry  on  many  forms  of  activity  which  are  not  an 
essential  part  of  their  business  of  fm-nishing  insurance, 
and  the  expense  of  which  is  paid  out  of  the  premiums 
they  receive,  the  cost  of  the  insurance  itself  is  less  than 
the  amount  of  the  premium.  In  a  strict  economic  sense 
the  insurance  premium  includes  only  that  part  of  the  pay- 
ment to  the  company  that  would  have  to  be  made  to  in- 
duce it  to  assume  the  risk.  Expenditures  for  preventive 
measures,  whether  made  directly  by  the  entrepreneur 
himself,  or  first  incurred  by  the  insurance  company  and 
then  recovered  from  the  insured,  are  no  part  of  the  cost 
of  insurance.  This  distinction,  however,  is  not  observed 
by  all  writers.'  Because  the  entrepreneur  has  a  choice  be- 
tween p:'evention  and  insurance,  it  seems  to  be  inferred 
that  the  two  forms  of  expenditure  are  essentially  alike. 
It  is  evident,  however,  that  if  all  expenditures  for  the  pur- 
pose of  preventing  accidental  loss  are  to  be  regarded  as 
insurance  premiums,  a  very  considerable  part  of  the  cost 
of  production  must  come  under  that  head.  Such  an  exten- 
sion of  the  term,  insurance,  utterly  destroys  its  economic 
significance.  Nor  is  the  situation  much  improved  by  limit- 
ing its  application  to  the  expenditures  for  those  preventive 
measures  that  make  it  possible  to  obtain  insurance  from 
organized  companies  at  a  lower  rate.  The  distinction  does 
not  depend  on  any  such  accidental  circumstance  as  that. 
It  goes  back  to  the  fundamental  difference  between  the 

1  See,  for  example,  Alfred  Marshall,  Principles  of  Economics,  Vol.  I, 
p.  469,  note.  "Again,  certain  insurance  companies  in  America  take 
risks  against  fire  in  factories  at  very  much  less  than  the  ordinary 
rates,  on  condition  that  some  prescribed  precautions  are  taken,  such 
as  providing  automatic  sprinklers,  and  making  the  walls  and  floors 
solid.  The  expense  incurred  in  these  arrangements  is  really  an  insur- 
ance premium.  ..." 


FUNCTION   OF   FIRE   INSURANCE  55 

methods  by  which  the  amounts  of  the  two  kinds  of  pay- 
ments are  determined.  One  includes  an  element  of  reward 
for  risk-taking,  which  in  the  case  of  insurance  goes  to  the 
insurer,  whose  capital  is  bearing  the  risk;  the  other  is 
determined  by  the  direct  cost  of  introducing  the  preventive 
measure,  whether  the  work  is  done  by  the  entrepreneur 
himself  or  by  the  company.  Prevention  and  insurance 
are  complementary  methods  of  preparing  to  meet  uncer- 
tain losses;  only  confusion  can  result  from  the  attempt 
to  make  them  identical. 

Not  only  do  insurance  companies  carry  on  many  forms 
of  acti\dty  that  are  no  part  of  their  peculiar  functions  as 
insurers,  but  not  all  their  activity  as  insurers  lias  any 
direct  bearing  on  the  productivity  of  capital.  The  insur- 
ance of  consumption  goods  is  almost  as  common  as  the 
insurance  of  capital  goods.  It  would  not  be  difficult,  in 
the  light  of  the  principles  already  discussed,  to  discover 
the  laws  that  determine  the  adoption  of  insurance  by  the 
owners  of  consumption  goods,  or  the  nature  of  the  social 
service  that  such  insurance  renders.  A  study  of  that 
sort  would  not  be  without  interest,  but  it  is  outside  the 
range  of  our  investigation.  We  are  concerned  only  with 
the  insurance  of  capital,  that  is,  with  insurance  as  a  method 
of  lowering  the  cost  of  producing  commodities. 

Insurance  is  primarily  a  method  of  making  accumula- 
tions to  meet  uncertain  losses.  Attention  has  already 
been  called  to  the  gain  that  accrues  to  society  through 
the  reduction  in  the  amount  of  such  accumulations  which 
insurance  brings  about.  There  are  one  or  two  other 
points  in  connection  with  this  aspect  of  the  institution 
that  deserve  consideration.  Cai)ital  alone  can  insure 
capital.  The  guarantee  of  security  by  one  who  had  no 
means  of  making  good  the  losses  that  occurred  would  be 
a  fruitless  jjroceeding.  The  amount  of  capital  necessary 
to  give  security  evidently  depends  on  the  amount  of  risk 
that  the  capital  assumes.  As  the  numlxM*  of  risks  carried 
by  an  insurance  company  increases,   the  amount  of  its 


56  YALE  READINGS   IN   INSURANCE 

accumulations  also  must  increase.  Stock  companies  start 
with  a  certain  amount  of  capital  contributed  by  the  mem- 
bers of  the  company,  and  make  additional  accumulations 
out  of  the  contributions  of  the  insured.  Mutual  com- 
panies, if  they  are  to  perform  their  functions  perfectly, 
nmst  also  make  accumulations  of  the  same  kind,  but  these 
funds  are  all  contributed  by  the  insured  themselves,  who 
virtually  constitute  the  company.  From  the  point  of 
view  of  economic  theory  the  difference  between  the  two 
kinds  of  companies  is  of  no  significance.  One  form  of 
insurance  is  not  necessarily  any  cheaper  than  the  other. 
If  the  entire  business  of  insurance  were  on  a  strictly  com- 
petitive basis,  and  if  the  accumulation  of  tlie  companies 
were  in  all  cases  limited  to  the  amounts  necessary  to  give 
security,  it  would  be  a  matter  of  no  importance  by  whom 
the  funds  were  contributed.  Capital  is  invested  in  the 
business  of  insurance  for  the  same  purpose  that  any  other 
investment  is  made  —  in  order  to  obtain  reward.  If  the 
insuring  fund  of  the  mutual  companies  is  made  up  out  of 
the  current  contributions  of  the  insured,  the  owners  of 
the  capital  thus  invested  will  require  in  some  form  the 
same  return  on  their  capital  that  they  could  obtain  in 
any  other  investment  with  the  same  degree  of  risk.  The 
members  of  the  mutual  company  are  carrying  on  the  busi- 
ness of  insurance  with  a  part  of  their  capital,  which  acts 
as  a  guarantee  fund  for  the  capital  that  they  have  invested 
in  more  hazardous  enterprises.  The  gain  accrues  to  the 
insured  as  insurers  instead  of  accruing  to  the  members  of 
a  stock  company.  As  there  is  no  reason  why  the  accumu- 
lations of  mutual  companies  should  be  any  less  than  the 
accumulations  of  stock  companies,  of  which  the  capital 
stock  forms  a  part,  there  is  no  reason  why  the  return  to  the 
capital  thus  invested  should  be  any  less  in  the  former  than 
in  the  latter.  Wliatever  gain  can  be  secured  under  com- 
petitive conditions  by  insuring  in  a  mutual  company  rather 
than  in  a  stock  company  is  due  to  the  fact  that  the  insured 
themselves  have  invested  capital  in  the  insurance  business. 


FUNCTION   OF  FIRE  INSURANCE  57 

How  large  the  accumulations  of  insurance  companies 
ought  to  be  in  proportion  to  the  risks  they  carry  can  be 
determined  only  by  experience.  The  prime  requisite  of 
such  an  institution  is  security.  Therefore  the  accumula- 
tions must  be  large  enough  to  cover  the  probable  losses, 
with  a  margin  of  safety  for  unexpectedly  large  ones.  It 
is  safe  to  say,  however,  that  the  accumulations  of  many 
companies  are  in  excess  of  the  amount  thus  determined. 
I  do  not  refer  here  to  the  accumulations  made  by  life  insur- 
ance companies,  which  combine  entirely  different  functions 
with  that  of  insurance,  and  a  large  part  of  whose  funds 
represent  simply  investments  of  capital  by  the  insured. 
Nor  do  I  include  that  part  of  the  funds  of  insurance  com- 
panies which  is  used  for  other  purposes  than  insurance, 
such  as  the  expenditures  for  preventive  measures.  That 
part  of  their  accumulations  which  is  strictly  an  insurance 
fund  is  often  larger  than  it  needs  to  be.  The  possibility 
of  making  such  unnecessarily  large  accumulations  is  due 
to  imperfect  competition,  which  does  not  force  the  cost  of 
insurance  down  to  the  competitive  level.  If,  however, 
it  were  necessary  for  these  funds  to  lie  idle  in  the  vaults 
of  the  company,  it  is  evident  that  there  would  be  no  motive 
for  making  accumulations  larger  than  the  conditions  of 
the  business  demanded.  Any  excess  would  be  distributed 
as  dividends  among  the  stockholders  of  the  company,  or, 
in  a  mutual  company,  would  result  in  an  immediate  lower- 
ing of  the  insurance  premium.  That  this  distribution  of 
the  entire  surplus  does  not  take  place  is  explained  by  the 
fact  that  capital  which  is  insuring  the  other  capital  is  not 
prevented  on  that  ground  from  participating  in  other 
forms  of  industrial  activity.  We  have  already  seen  in 
the  case  of  the  capitalist-entrepi-eneur  that  while  his  own 
capital  acts  as  a  guarantee  fund  for  the  capital  that 
he  borrows,  it  at  the  same  time  i)erf()iins  its  part  in  the 
direct  productive  activity  of  the  industry  in  which  it  is 
invested.  The  fulfilment  of  the  insurance  contract  does 
not  ref^uire  the  creation  of  new  capital;  it  requires  merely 


58  YALE  READINGS  IN  INSURANCE 

the  transfer  of  the  ownership  of  existing  capital.  There- 
fore the  accumulated  funds  of  insurance  companies,  even 
that  part  of  them  which  is  economically  necessary,  instead 
of  remaining  otherwise  unproductive,  are  invested  in  such 
ways  that  they  earn  an  income  for  the  company.  Of  course 
there  are  certain  restrictions  as  to  the  forms  in  which 
such  investments  should  be  made.  For  practical  reasons 
it  is  desirable  that  the  funds  should  be  invested  where  there 
is  the  least  danger  of  loss,  and  where  the  difficulty  of  realiz- 
ing on  the  investments  is  at  a  minimum.  But  the  im- 
portant point  is  that  capital  which  is  insuring  other  capital 
may  at  the  same  time  be  directly  employed  in  the  pro- 
duction of  wealth.  The  unnecessarily  large  surpluses  of 
insurance  companies  are  allowed  to  accumulate,  not  for 
the  sake  of  the  reward  they  can  obtain  in  the  insurance 
business,  but  for  the  sake  of  the  interest  paid  for  their 
use  by  those  to  whom  they  are  lent. 

It  is  evident  that  the  possibility  of  using  productively 
the  reserve  funds  of  insurance  companies  reduces  the  cost 
of  insurance.  Under  competitive  conditions  the  return 
that  capital  invested  in  the  insurance  business  can  secure 
will  be  fixed.  In  the  long  run  it  will  consist  of  pure  inter- 
est plus  the  reward  for  carrying  the  risk  to  which  it  is 
exposed.  All  other  income  that  the  companies  receive 
will  operate  to  reduce  the  payments  of  the  insured.  If  it 
were  necessary  for  reserve  funds  to  remain  unproductive, 
the  income  that  they  now  earn  would  have  to  be  obtained 
from  the  insured  in  the  form  of  higher  premiums. 

One  question  in  this  connection  remains  to  be  answered: 
In  what  sense  is  the  employment  of  capital  to  insure  other 
capital  a  productive  function?  The  difficulty  in  answering 
this  question  is  due  to  two  circumstances.  On  the  one 
hand,  capital  which  is  insuring  other  capital  may  at  the 
same  time  be  productively  employed  in  other  ways  and 
create  the  same  amount  of  physical  product  as  any  other 
capital  so  employed.  On  the  other  hand,  the  reward 
which  capital  obtains  for  insuring  other  capital  is  entirely 


FUNCTION  OF  FIRE  INSURANCE  59 

created  by  the  capital  that  is  insured.  It  is  evident, 
therefore,  that  insuring  capital,  as  such,  is  not  directly 
creating  physical  product.  Its  service  is  to  create  a  con- 
dition which  increases  the  productivity  of  the  capital  that 
is  insured.  In  return  for  this  service  a  part  of  the  product 
of  the  insured  capital  is  handed  over  to  the  insurer.  But 
this  is  not  to  deny  the  productivity  of  the  insuring  capital. 
In  an  economic  sense  the  product  of  a  unit  of  capital  is 
the  part  of  the  total  product  whose  creation  is  due  to  the 
presence  of  that  particular  unit.  If,  then,  the  insuring 
capital,  by  virtue  of  its  service  in  guaranteeing  safety, 
increases  the  total  product  of  the  insured  capital,  the 
additional  part  must  be  attributed  to  the  insuring  capital 
as  its  product.  If  there  were  a  monopoly  of  the  privilege 
of  granting  insurance,  the  entire  increase  in  product  might 
be  appropriated  by  the  insurers.  Perfect  competition,  on 
the  other  hand,  would  bring  about  an  influx  of  capital 
into  the  insuring  business  which  in  the  end  would  reduce 
the  total  return  to  capital  in  it  to  the  same  proportions 
as  the  return  to  capital  in  any  other  industry  involving 
the  same  degree  of  risk.  The  remainder  of  the  economic 
gain  due  to  the  existence  of  the  institution  of  insurance 
would  then  accrue  chiefly  to  the  consumers  of  the  commodi- 
ties created  in  the  industries  in  which  the  insured  capital 
is  employed.  There  is  no  fundamental  difference  in  kind 
between  the  reward  for  risk-taking  which  accrues  to  capital 
employed  directly  in  a  hazardous  enterprise  and  the  reward 
which  insuring  capital  obtains  for  the  risk  it  assumes.  In 
both  cases  there  is  an  increased  productivity  of  industry 
on  account  of  the  assumption  of  the  risk,  and  in  both  cases 
the  capital  exposed  to  risk  obtains  a  part  of  the  increased 
product  as  its  special  reward.  In  both  cases,  moreover, 
the  amount  of  the  extra  reward  which  capital  can  obtain 
by  assuming  risk  is  fixed  by  the  sacrifice  of  the  most  reluc- 
tant investor  whose  capital  is  needed  to  meet  the  demands 
of  society.  The  only  difference  between  the  two  kinds  of 
income  is  the  comparatively  unimportant  one  that  in  the 


60  YALE  READINGS  IN   INSURANCE 

former  case  the  extra  product  is  created  directly  by  the 
capital  that  receives  it,  while  in  the  latter  case  it  is  created 
by  other  capital  and  handed  over  to  the  insuring  capital  as 
a  reward  for  creating  the  conditions  which  make  possible 
the  increased  productivity  of  the  capital  which  is  insured. 

The  statement  is  sometimes  made  that  all  insurance  is 
mutual  insurance/  It  is  evident  from  a  consideration  of 
the  facts  already  established  that  this  is  only  partially 
true.  All  insurance  is  mutual  in  the  sense  that  all  the 
losses  are  in  the  long  run  paid  by  the  insured.  Obviously 
an  insurance  company  could  not  long  survive  if  it  syste- 
matically made  good  the  losses  of  the  insured  out  of  its 
own  capital.  To  the  company  the  payment  of  losses  is 
an  element  in  the  cost  of  carrying  on  its  business,  and  in 
the  long  run  consumers  necessarily  pay  all  the  expenses 
of  production.  This  mutual  aspect  of  insurance,  how- 
ever, does  not  bring  out  its  fundamental  significance.  This 
lies  in  the  reduction  of  the  cost  of  producing  commodities 
through  the  relief  of  producers  from  the  disagreeable 
feelings  aroused  by  uncertainty,  and  the  substitution  of 
security  for  insecurity.  The  burden  of  insecurity,  which 
would  rest  upon  individual  producers  in  the  absence  of  a 
system  of  insurance  is  in  no  way  borne  by  the  insured  as 
a  body  after  insurance  has  been  introduced.  A  large  part 
of  it  is  entirely  annihilated,  and  the  remainder  rests  upon 
the  insurers  whose  capital  has  assumed  the  risks  of  the 
insured.  Even  in  the  case  of  so-called  mutual  companies, 
while  the  surviving  uncertainty  is  still  borne  by  the  mem- 
bers of  the  company,  the  real  significance  of  the  institu- 
tion does  not  lie  in  this  fact,  but  in  the  reduction  of  the 
uncertainty  as  a  result  of  the  insurance.  The  over- 
emphasis of  its  importance  in  causing  a  diffusion  of  loss 
is  due  to  an  imperfect  analysis  of  its  economic  effects. 

Insurance  is  evidently  far  from  being  a  gratuitous  gift 

•See,  for  example,  H.  C.  Emery,  "The  Place  of  the  Speculator  in 
the  Theory  of  Distribution,"  Publications  of  the  American  Economic 
Association,  3d  Series,  Vol.  I,  No.  1,  p.  105. 


FUNCTION  OF  FIRE  INSURANCE  61 

to  society.  The  component  parts  of  its  cost  are  the  wages 
of  the  labor  employed  in  the  insurance  business,  interest 
on  the  capital  invested  in  it,  and  any  increase  in  the  amount 
of  positive  loss  through  fraud  or  carelessness,  which  the 
existence  of  insurance  induces.  This  cost  first  falls  upon 
the  entrepreneurs  who  choose  to  insure  their  capital  rather 
than  to  pay  capitalists  a  higher  price  on  account  of  risk. 
To  the  entrepreneurs,  therefore,  it  is  a  part  of  the  cost  of 
production;  it  will  be  embodied  in  the  price  of  the  com- 
modities, and  will  thus  be  shifted  to  the  shoulders  of  con- 
smners.  It  is  in  the  end  the  consuming  public  that  pays 
the  entire  expense  of  insurance.  This  does  not  by  any 
means  imply  that  the  condition  of  consumers  is  not  bene- 
fited by  the  existence  of  insurance.  The  comparison  lies, 
not  between  the  cost  of  insurance  and  no  cost,  but  between 
the  cost  of  insurance  and  the  cost  of  risk  without  insur- 
ance. The  gain  to  the  consumer  comes  through  the  re- 
duction in  the  price  of  commodities,  and  the  amount  of 
the  reduction  is  determined  by  the  difference  between  the 
interest  which  the  entrepreneur  would  have  to  pay  for 
capital  exposed  to  the  entire  risk  of  the  industry  on  the 
one  hand,  and  the  lower  interest  on  the  capital  when  it 
is  insured,  plus  the  cost  of  the  insurance  itself  on  the  other 
hand. 

There  has  been  a  singular  lack  of  unanimity  among 
writers  on  political  economy  with  regard  to  the  division 
of  economic  theory  in  which  the  treatment  of  insurance 
ought  to  be  placed.  Some  have  considered  it  in  connec- 
tion with  production,  others  have  regarded  it  as  a  phe- 
nomenon of  consumption,  while  still  others  have  found  it 
inexpedient  to  bring  it  under  any  of  the  recognized  divi- 
sions, and  have  put  it  at  the  end  of  their  woi-ks  along  with 
other  subjects  of  a  more  or  less  dubious  economic  character. 
There  seems  to  be  little  occasion  for  such  uncertainty. 
If  the  old  divisions  of  production,  distribution,  exchange, 
and  consumption  are  to  be  maintained,  tlu^re  is  no  doubt 
that  the  proper  place  for  the  discussion  of  insurance,  at 


62  YALE  READINGS  IN  INSURANCE 

least  so  far  as  insurance  of  capital  is  concerned,  is  in  the 
department  of  production.  With  regard  to  the  insurance 
of  consumption  goods  the  case  may  not  seem  so  plain  at 
first  sight,  since  there  is  not  the  same  direct  relation 
between  such  insurance  and  the  productivity  of  industry. 
Nevertheless,  it  undoubtedly  belongs  in  the  division  of 
production.  It  belongs  there,  not  because  it  affects  the 
productivity  of  other  capital,  but  because  the  creation  of 
security  is  in  itself  a  form  of  production.  If  the  owners 
of  consumption  goods  are  walling  to  pay  a  price  for  the 
sake  of  having  them  insured,  it  is  evident  that  they  are 
obtaining  something  in  exchange  which  is  of  more  value 
to  them  than  the  money  with  which  they  part.  What 
they  obtain  is  security,  and  whether  or  not  it  seems  best 
to  consider  such  security  as  a  consumption  good,  or  as 
any  form  of  wealth,  it  cannot  be  questioned  that  the  capi- 
tal and  labor  engaged  in  creating  it  are  serving  mankind 
in  the  same  way  as  that  employed  in  the  creation  of  any 
commodity  for  which  consumers  are  willing  to  pay. 

The  conclusions  reached  in  the  present  chapter  are  in 
part  as  follows:  Complete  insurance,  in  the  economic 
sense,  is  the  accumulation  of  funds  for  uncertain  losses, 
and  the  combination  of  the  risks  of  individuals  in  a  group. 
The  advantage  of  such  an  institution  in  society  is  the  result 
of  its  influence  in  reducing  the  burden  of  risk.  To  call  all 
insurance  mutual,  or  to  define  it  as  the  distribution  of 
losses,  is  to  put  the  emphasis  on  a  comparatively  unim- 
portant aspect  of  it ;  to  call  it  gambling  is  to  confuse  forms 
of  activity  fundamentally  different  both  in  their  purpose 
and  in  their  consequences.  Capital  employed  in  insuring 
other  capital  is  productive,  and  the  reward  it  receives  is  a 
part  of  its  product.  Capital  employed  in  insuring  con- 
sumption goods  is  creating  something  for  which  the  owners 
of  the  goods  are  willing  to  pay.  It,  therefore,  is  also  pro- 
ductive. The  treatment  of  insurance  naturally  belongs 
in  the  division  of  economic  theory  that  deals  with  the 
phenomena  of  the  production  of  wealth. 


CHAPTER   IV 

ORGANIZATION    OF    COMPANIES  * 

• 

In  a  general  way  it  may  be  said  that  fire  insurance  is 
transacted  through  three  different  agencies,  the  first  and 
most  important  of  which  is  the  stock  companies;  the  second, 
the  various  forms  of  mutual  companies,  and  the  com- 
paratively unimportant  third,  the  association  of  individ- 
ual insurers  known  as  individual  underwriters,  and  Lloyds. 
Mutual  companies  again  may  be  divided  into  three  classes 
—  first,  the  local  county  or  town  mutuals;  second,  the  state 
or  general  mutuals,  and  third,  the  manufacturers  mutuals 
commonly  known  as  the  factory  mutuals  and  their  imi- 
tators. 

The  local  or  county  mutuals  are  by  far  the  most  numer- 
ous of  any  class  of  companies  in  the  United  States,  Their 
number  is  approximately  1500.  There  are  125  in  New 
York  State  alone. 

The  laws  which  govern  their  organization  and  operation 
are  very  dissimilar  in  the  different  states.  In  some 
states,  notably  in  New  York,  they  are  prohibited  from 
operating  in  large  cities.  This  is,  in  New  York  at  least,  a 
result  of  the  great  fire  of  1845,  when  all  existing  mutual 
companies  doing  business  in  New  York  City  were  bank- 
rupted. Usually  their  operations  are  limited  by  law  to  a 
few  non-hazardous  classes  —  such  as  farm  property, 
dwellings,  churches,  and  stores  —  in  a  given  limited  dis- 
trict.    Often  their  operations  are  comfined  to  a  town  or 

'  By  Richard  M.  Bissell,  Vice-President  of  the  Hartford  Fire  Insur- 
ance Company,  Hartford.  Reprinted  from  j)agcs  66-85  of  the  "  Yale 
Lectures  on  Insurance,  Fire  and  Miscellaneous." 

63 


64  YALE  READINGS  IN   INSURANCE 

county,  though  in  New  York  State  a  local  mutual  company 
may  operate  throughout  five  counties. 

As  a  rule  they  must  have,  before  organization  is  per- 
fected, applications,  i.e.,  promises  for  a  certain  amount 
of  insurance,  usually  somewhere  between  $50,000  and 
$200,000,  already  on  file,  and  a  portion  of  the  premiums 
therefor  —  commonl}^  25  per  cent.  —  paid  in  advance  in 
cash. 

Having  secured  the  necessary  applications,  those  who 
are  organizing  the  company  —  usually  a  group  of  farmers, 
who  think  the  charges  of  the  stock  companies  are  exorbi- 
tant —  secure  from  the  state  authorities  the  proper  papers 
of  incorporation;  then  a  meeting  of  the  applicants  or 
members  is  called  and  officers  are  elected.  Business  is 
then  begun  by  issuing  their  policies  to  the  original  appli- 
cants. In  most  cases  all  the  w^ork  of  the  company  is  done 
by  the  secretary,  who  very  likely  is  the  village  postmaster, 
store-keeper,  or  bank  cashier,  and  who  receives  a  fee  for 
each  policy  issued,  or  who  may  be  compensated  by  a 
salary.  Those  interested  in  the  company  urge  their 
friends  and  neighbors  to  join  them,  appreciating  the  neces- 
sity for  a  considerable  number  of  policy-holders  amongst 
whom  the  losses  may  be  divided.  The  applications  thus 
secured  are  usually  passed  upon  as  to  valuations,  desira- 
bility, etc.,  by  the  executive  committee  or  board  of  direc- 
tors. If  an  application  is  approved  a  policy  is  issued  by 
the  secretary,  and  perhaps  signed  by  one  or  two  of  the 
committee.  These  policies  are  issued  in  consideration  of 
a  small  cash  payment,  equal  to  about  one-fourth  the 
price  commonly  charged  by  stock  companies,  and  a  note 
given  by  the  applicant  for  an  amount  equal  to  three  or 
four  times  the  cash  payment.  These  notes  are  subject  to 
call  if  the  needs  of  the  company  so  require.  Each  policy- 
holder is  liable  for  the  losses  of  the  company,  according 
to  the  articles  of  agreement  or  incorporation  or  the  by-laws 
of  the  particular  company  in  which  he  is  insured,  or  per- 
haps according  to  an  agreement  assented  to  when  the 


ORGANIZATION  OF  COMPANIES  65 

policy  is  issued.  Sometimes  the  limit  of  liability  is  stated 
in  the  policy.  In  some  cases  each  policy-holder  is  liable 
for  his  fractional  share  of  any  or  all  liabilities  which  may 
come  to  the  company.  More  often,  however,  this  lia- 
bility is  limited  to  a  certain  percentage  of  the  amount  of 
insurance  the  individual  carries  or  to  some  multiple  of  the 
amount  for  which  he  has  given  premium  notes.  The 
policies  are  usually  issued  for  five  years. 

Since  the  executive  committee  and  all  the  applicants  are 
neighbors  and  acquaintances,  the  personal  and  financial 
qualifications  of  every  applicant,  as  well  as  the  value  and 
condition  of  his  property,  are  well  known,  and  thus  the 
danger  from  dishonest  losses  or  over-valuation  is  reduced 
to  a  minimum.  No  man  with  a  bad  reputation  can  secure 
insurance  in  one  of  these  institutions,  if  it  is  properly 
conducted.  Moreover,  every  policy-holder  is  constantly, 
as  it  were,  under  the  surveillance  of  his  neighbors,  who  are 
members  —  many  of  them  —  of  the  same  company;  con- 
sequently the  opportunities  for  the  successful  perpetration 
of  fraud  are  not  good.  Furthermore,  while  in  many  rural 
communities  it  is  considered  a  very  clever  business  stroke 
to  get  the  better  of  one  of  the  large  stock  companies,  who, 
like  the  railroads,  are  looked  upon  as  natural  enemies, 
it  is  an  entirely  different  matter  when  a  man's  desire  to 
realize  on  his  policy  results  in  an  assessment  upon  his 
neighbor.  An  attempt  to  do  so,  whether  successful  or 
not,  usually  results  in  ostracism  for  the  offender. 

These  companies,  when  wisely  and  honestly  managed, 
succeed  or  fail  according  to  the  burning  record  of  the  dis- 
tricts where  they  operate.  A  few  heavy  losses  in  the 
earlier  years  of  their  existence  usually  finish  them. 
Farmers  and  villagers  quickly  tire  of  assessments.  On 
the  other  hand,  in  those  districts  which  have  had  favor- 
able records  as  to  fires  —  and  there  are  many  such  — 
these  little  companies  live  and  prosper  for  years.  Often 
they  accumulate  assets  of  considerable  value  and  in  such 
cases  furnish  indemnity  to  their  members  at  very  low  cost. 


66  YALE  READINGS  IN   INSURANCE 

Having  no  expense  of  any  kind  save  the  fees  of  the  secre- 
tary and  the  cost  of  their  few  supplies,  they  can  be  very 
economically  operated.  Whether  their  record  as  a  whole 
has  been  one  of  profit  or  loss  to  their  members  cannot  be 
said  with  any  degree  of  certainty.  Large  numbers  are 
organized  and  equally  large  numbers  fail  every  year,  and 
while  many  are  short-lived,  some  exist  to-day  which  are 
fifty  or  more  years  old. -Their  strength  and  their  weak- 
ness alike  are  largely  due  to  the  fact  that  they  transact 
business  in  a  very  limited  field,  where  every  risk  is  known 
and  watched,  but  where  a  few  losses  make  insurance  very 
costly  owing  to  the  Umited  number  of  those  among  whom 
the  losses  are  distributed.  They  are  usually  free  from 
the  heavy  burden  of  taxation  which  rests  upon  stock 
companies,  being  thus  favored  by  that  policy  of  dis- 
crimination on  the  part  of  the  legislator  which  so  often  is 
in  evidence  where  the  farmer  or  laboring  man  is  concerned. 
H  Concerning  the  formation  of  the  mutual  companies 
which  do  a  general  business  throughout  one  or  more 
states,  and  which  are  usually  called  state  mutuals  to  dis- 
tinguish them  from  county  and  town  mutuals,  the  laws 
of  the  different  states  vary  to  an  extreme  degree.  In 
New  York  and  some  other  states  there  are  no  laws  what- 
ever governing  or  controlling  such  companies.  In  others, 
as  for  instance  Wisconsin,  the  laws  are  specific  and  minute. 
On  the  whole,  the  most  marked  difference  between  these 
laws  and  those  which  govern  the  town  mutuals  concern 
the  amount  of  applications  for  insurance  which  must  be 
secured  before  a  charter  can  be  had.  In  Wisconsin  this 
amount  is  $750,000  as  compared  with  $50,000  for  a  local 
mutual  company.  In  some  states  the  classes  of  business 
which  these  state  mutuals  may  write  are  limited  by  law; 
in  others  the  maximum  amount  of  liability  which  may  be 
assumed  on  any  one  risk  is  so  fixed.  The  Wisconsin  law  is 
remarkable  for  providing  specifically  for  five  kinds  of 
mutual  companies  which  may  transact  business  over  an 
extended  territory.     Among  them  are  companies  formed 


ORGANIZATION  OF  COMPANIES  67 

by  retail  lumber  dealers,  hardware  dealers,  church  societies, 
and  finally  a  class  unique  in  insurance  history  so  far  as  I 
know,  viz.,  mutual  companies  formed  by  the  treasurers 
of  county  insane  asylums  and  poorhouses. 

These  general  or  state  mutuals  have  not  on  the  whole 
been  successful,  for,  having  ordinarily  no  great  strength 
of  assets,  they  cannot  command  business  in  districts 
remote  from  their  place  of  domicile,  except  by  quoting 
dangerously  low  prices.  Moreover,  they  are  compelled 
to  delegate  to  agents  or  others  the  power  to  select  risks 
and  do  not  always  get  the  best  service.  Those  who 
operate  the  company  lack  the  incentive  of  profit,  a  most 
important  factor. 

Such  companies  commonly  do  not  possess  and  cannot 
acquire  the  highly  trained  staff,  the  complete  organization 
and  concentration  of  authority  necessary  for  the  success- 
ful prosecution  of  a  general  business  under  competitive 
conditions  throughout  a  wide  territory,  and  when  such 
powers  are  given  to  some  official  of  a  mutual  company,  too 
often  the  trust  is  abused.  As  long  as  the  business  grows 
rapidly  and  heavy  assessments  are  avoided  —  for  the  loss 
ratio  on  a  rapidly  growing  business  is  always  small  —  the 
members  are  not  likely  to  interest  themselves  in  the 
methods  pursued,  and  when,  after  a  time,  the  assessments 
become  heavy  it  is  usually  too  late  to  apply  a  remedy. 
The  fact  that  there  were  seventy-four  such  mutual  com- 
panies in  New  York  State  alone  in  1853,  and  but  two  or 
three  to-day,  is  sufficient  commentary  on  their  experience, 
to  which  it  is  })(;rhaps  permissible  to  add  the  following 
from  the  first  annual  report  of  the  Insurance  Department 
of  the  State  of  Pennsylvania,  issued  in  1863 : 

"Not  a  few  mutual  companies  have  been  shipwrecked 
because  of  the  ambition  of  officers  to  accumulate  a  large 
business;  going  far  from  home;  trusting  to  agents,  and 
measuring  prosperity  by  the  amount  at  risk  and  gross 
cash  receipts. 

"Near  home,  within  ilie  limits  of  half  a  dozen  counties, 


68  YALE  READINGS  IN  INSURANCE 

the  officers  and  members  are  more  or  less  intimately 
acquainted  with  the  character  of  those  composing  the 
partnership  and  the  property  at  risk;  but  far  from  home, 
in  this  or  other  states,  they  are  necessarily,  to  a  great 
degree,  ignorant.  There  the  agent  acts  for  them.  His 
interest  is  to  do  as  much  business  as  possible  and  he  is 
not  always  so  critical  as  to  the  risks  he  assumes  as  he 
ought  to  be.  In  time,  loss  after  loss  is  followed  by  assess- 
ment upon  assessment,  until  the  home  members  of  the 
company  find  that  the  insurance  which  ought  to  have  been 
cheap  has  turned  out  very  dear.  The  cause  of  the  disaster 
is  very  plain.  The  laws  essential  to  cheap  insurance  have 
been  set  at  defiance.  Hazardous  and  special  risks  have 
been  written  at  rates  far  less  than  the  stock  companies 
could  afford,  as  if  the  mutual  system  contained  within 
itself  an  exemption  from  the  inevitable  laws  of  hazard. 
The  officers  of  the  company  attribute  their  misfortunes 
to  an  unprecedented  run  of  ill  luck.  Mere  chance  played 
the  smallest  part  in  producing  the  catastrophe;  want  of 
knowledge  and  judgment  the  largest.  Then  comes  the 
trouble.  The  poUcy-holders  rebel  against  the  payment 
of  the  large  assessments.  The  company  resorts  to  litiga- 
tion to  compel  payment.  It  is  pressed  to  pay  losses  and 
is  compelled,  in  turn,  to  press  the  payment  of  assessments. 
The  practical  usefulness  of  the  company  is  at  an  end  and 
its  career  is  terminated  amid  the  execrations  of  all  parties 
interested." 

It  is  true  that  there  are  throughout  the  country  a  num- 
ber of  fortunately  prosperous  old  institutions  of  this  kind 
which  have  been  conservatively  managed,  have  transacted 
a  selected  business  only  of  the  non-hazardous  classes,  and 
have  confined  their  operations  almost  invariably  to 
limited  territory.  These  institutions  have  had  honorable 
careers,  and  have  furnished  cheap  indemnity. 

In  life  insurance  the  policy-holder  looks  to  the  company 
for  a  certain  definite  payment  at  some  time  in  the  future, 
and,  so  far  as  experience  shows,  runs  little  if  any  risk  of 


ORGANIZATION  OF  COMPANIES  69 

personal  liability  by  becoming  a  member  of  a  mutual 
company.  In  fire  insurance,  however,  the  policy-holder 
contracts  for  indemnity  against  an  extraordinary  and 
even  unlikely  loss,  and  yet  by  joining  a  mutual  company 
he  exposes  himself  to  the  possibility  of  a  serious  personal 
liability,  in  the  event  of  a  conflagration,  or  if  the  bad 
selection  of  risks  results  in  heavy  losses.  Instances  have 
occurred  where  former  policy-holders  have  been  assessed 
as  late  as  five  years  after  their  own  policies  had  expired, 
and  long  after  they  supposed  their  connection  with  the 
mutual  company  of  which  they  had  been  members  had 
ceased. 

We  now  come  to  the  consideration  of  the  most  interest- 
ing, and,  so  far  as  their  influence  on  the  methods  of  fire 
insurance  companies  and  on  the  fire  loss  of  the  country 
is  concerned,  by  far  the  most  important  class  of  mutual 
companies,  viz.,  those  known  as  the  factory  mutuals. 

Edward  Atkinson,  LL.D.,  one  of  their  most  eminent 
officials  and  advocates,  is  authority  for  the  statement  that 
this  class  of  companies  was  devised  for  the  prevention  of 
loss  by  fire,  the  payment  of  indemnity  for  losses  sustained 
being  a  secondary  matter. 

Theoretically  speaking,  insurance  companies  pure  and 
simple  have  nothing  to  do  with  the  prevention  or  extin- 
guishment of  fires,  or  with  the  reduction  of  the  fire  waste. 
Their  province  is  merely  to  distribute  the  losses  which  fires 
cause.  Despite  this  truth,  it  was  a  short-sighted  business 
policy  which  prevented  the  stock  companies  from  actively 
cooperating  with  factory  owners,  especially  with  cotton 
and  woolen  manufacturers,  who,  when  the  burning  ratio, 
and  hence  the  cost  of  indemnity,  had  risen  to  an  unbear- 
able extent,  sought  so  to  improve  their  property  as  to 
reduce  the  number  and  amount  of  losses  and  so  indirectly 
the  cost  of  insurance.  It  seems  to  be  true,  however,  that 
the  failure  or  absence  of  such  cooperation  was  largely 
responsible  for  the  origin  of  this  class  of  factory  mutual 
companies,  whose  methods  as  first  practised  by  themselves, 


70  YALE  READINGS  IN   INSURANCE 

later  by  the  stock  companies,  have  fairly  revolutionized 
methods  of  protection  against  fire  and  made  possible 
greatly  reduced  rates  for  risks  of  all  classes  when  properly 
protected. 

The  first  of  these  companies  was  organized  in  1835  by 
Zachariah  Allen  in  Providence,  Rhode  Island,  and  was 
called  the  Providence  Manufacturers'  Mutual  Company. 
In  1850  there  were  three  of  these  companies,  and  the 
number  had  increased  to  seven  by  1860.  There  are  now  in 
Rhode  Island  and  Massachusetts  eighteen  such  companies 
in  active  operation,  and  others  in  Pennsylvania  and  other 
parts  of  the  country.  These  companies  are  carrying 
insurance  amounting  to  over  one  billion  of  dollars  on  fac- 
tor}^ property. 

The  activity  of  these  companies  was  greatly  increased, 
and  the  expansion  of  their  operations  greatly  aided,  by 
the  material  advances  in  rates  which  were  made  by  the 
surviving  stock  companies  after  the  Chicago  and  Boston 
conflagrations.  These  advances,  amounting  to  56  per 
cent,  or  more,  compelled  factory  owners  to  look  about  for 
less  costly  sources  of  indemnity,  with  the  result  that  many 
of  them  adopted  factory  mutual  methods  of  protection 
and  secured  the  low-cost  insurance  resulting  therefrom. 

From  the  outset  these  companies  have  endeavored,  first, 
to  ascertain  and  eliminate  the  causes  of  fires,  and,  second, 
to  provide  such  ample  protection  that  any  fire  which  might 
occur  should  be  extinguished  with  but  slight  loss. 

In  these  particulars  the  record  of  the  Associated 
New  England  Factory  Mutual  Companies  has  been  quite 
wonderful.  Their  method  is  to  charge  a  cash  premium 
based  upon  the  class  of  work  done,  construction  of  the 
building  in  question,  the  extent  to  which  dangerous 
processes  are  eliminated,  and  the  extent  and  efficiency 
of  the  apparatus  for  extinguisliing  fires.  No  factory  can 
secure  the  protection  of  this  system  unless  in  respect  to 
all  these  matters  it  comes  up  to  a  prescribed  standard  of 
excellence.     In  addition  to  this  cash  payment,  a  liability 


ORGANIZATION  OF  COMPANIES  71 

for  assessments  equal  to  five  times  the  cash  premium  is 
assumed  by  the  pohcy-holder.  As  a  matter  of  fact,  how- 
ever, since  1850  no  assessment  has  been  found  necessary 
by  any  of  the  New  England  companies.  On  the  other 
hand,  the  cash  premiums  have  not  only  paid  losses  and 
expenses,  but  have  enabled  a  division  of  profits  to  be  made 
at  the  close  of  each  year.  In  this  way  the  actual  cost  of 
indemnity  is  reduced  to  a  small  amount. 

Mr.  Atkinson  ascribes  the  success  of  these  companies  to 
recognition  of  the  following  principle:  ''The  only  persons 
who  can  prevent  loss  by  fire  are  the  owners  or  occupants 
of  the  insured  premises.  Upon  them  rests  the  responsi- 
bility for  heavy  loss,  if  any  occurs,  in  nearly  every  fire. 
All  that  the  insurance  company  can  do  is  to  pay  indemnity 
for  loss  which,  if  large,  in  nine  cases  out  of  ten,  is  due  to 
the  lack  of  apparatus  for  preventing  loss  or  to  the  lack  of 
care  and  order  in  the  conduct  of  the  work." 

In  their  efforts  to  ascertain  and  eliminate  the  causes  of 
fire,  these  companies  have  investigated  and  endeavored  to 
safeguard  all  processes  used  in  manufacture.  They  have 
investigated  methods  of  illuminating,  heating,  lubricating; 
have  devised  elaborate  plans  for  the  safe  construction  and 
arrangement  of  factories  in  order  that  the  spread  of  fire 
might  be  retarded  and  that  especially  dangerous  processes 
might  be  isolated,  and,  finally,  have  tested  and  applied 
the  most  modern  and  approved  apparatus  for  extinguish- 
ing fires.  Moreover,  when  a  factory  comes  into  their 
membership  they  not  only  see  to  it  that  in  all  respects  its 
condition  is  brought  up  to  their  requirements,  but  by 
frequent  inspection  they  secure  the  constant  maintenance 
of  such  conditions.  They  are,  indeed,  hardly  to  be  called 
insurance  companies  at  all,  but  rather  associations  of 
manufacturers  with  cxi)erienced  inspectors  and  engineers, 
whose  work  it  is  to  eliminate  the  possibility  of  loss  or 
serious  damage  by  fire.  The  insurance  feature  only 
comes  into  play  when,  despite  their  precautions,  a  damage 
is  incurred.     It  will  be  realized  that,  though  the  number 


72  YALE  READINGS  IN   INSURANCE 

of  fires  and  the  loss  resulting  therefrom  have  been  very 
greatly  reduced  by  these  methods,  a  large  expenditure 
is  necessary  to  construct,  arrange,  and  equip  a  factory 
in  such  a  way  as  to  bring  it  up  to  the  standard  of  their 
requirements. 

Wliile  to  these  factory  mutuals  must  be  given  the  chief 
credit  for  inaugurating  such  plans  for  safeguarding  prop- 
erty, the  stock  companies  have  for  a  number  of  years  been 
pursuing  methods  of  cooperation  with  the  owners  of 
factories,  and  other  classes  of  property  as  well,  similar  to 
those  briefly  hinted  at  above,  and  now  are  as  well  equipped 
as  the  factory  mutual  companies  to  make  suggestions  to 
property  owners  for  the  proper  construction,  arrangement, 
care,  and  protection  of  their  property. 

The  properties  thus  equipped  in  accordance  with  the 
views  of  experts  are  called  "protected"  or  ''equipped" 
risks,  and  there  exists  the  keenest  rivalry  between  the 
factory  mutual  companies  and  the  stock  companies  to 
secure  the  control  of  this  class  of  business.  Thus  far  the 
efforts  of  the  mutual  companies  have  been  more  success- 
ful, especially  in  New  England,  though  the  stock  companies 
are  gradually  reducing  their  rates  to  a  point  where  they 
approximate  the  low  cost  at  which  the  factory  mutuals 
have  been  able  to  furnish  indemnity. 

There  is  no  reason  why  this  class  of  mutual  companies 
should  not  combine  to  prosper  if  they  continue  to  confine 
their  field  to  isolated  and  thoroughly  protected  factories, 
the  hazards  of  which  have  been  properly  provided  for. 

Mr.  Atkinson,  in  regard  to  this  matter,  says,  "The  method 
of  granting  contracts  by  the  factory  mutual  companies 
must  of  necessity  be  limited  to  special  establishments, 
each  carefully  guarded  from  the  other  and  fitted  with  its 
own  apparatus  for  the  extinction  of  fire.  The  mutual 
contract  cannot  safely  be  adopted  in  the  crowded  districts 
of  large  cities  for  the  reason  that  the  owner  or  occupant 
of  one  building  may  have  a  very  dangerous  neighbor  in 
the  next,  over  which  he  has  no  control." 


ORGANIZATION  OF  COMPANIES  73 

There  are  two  factors  unfavorable  to  this  class  of  com- 
panies; first,  the  possibility  that  too  extensive  liability, 
as  compared  with  the  income,  may  be  assumed  on  individ- 
ual risks,  owing  to  implicit  reliance  on  the  experience 
already  gained,  in  which  case  dangerously  large  losses 
may  be  incurred;  and,  second,  the  growing  competition 
of  the  stock  companies  for  the  protected  risks,  which  is 
constantly  becoming  keener.  The  stock  companies  have 
two  important  advantages  to  offer  their  patrons;  first, 
that  their  policies  are  issued  at  net  cost  instead  of  in  con- 
sideration of  a  cash  payment  to  be  later  reduced  by 
dividends;  second,  that  no  Hability  whatever  is  assumed 
by  the  policy-hokler. 

Insurance  organizations  of  another  class  have  flourished 
in  great  numbers  during  the  past  ten  or  fifteen  years. 
These  are  known  for  the  most  part  as  Lloyds  of  one  kind 
or  another.  They  are  voluntary  partnerships  for  the 
purpose  of  insuring  property.  As  a  rule  each  partner  is 
liable  for  a  certain  portion  of  every  loss  which  occurs. 
The  name  Lloyds  is,  of  course,  taken  from  the  famous 
English  institution,  and  is  too  often  used  in  order  to 
convey  the  imprc^ssion  that  these  new  American  concerns 
are  comparable  in  point  of  resources  and  reliability  with 
that  office.  As  a  matter  of  fact  very  few  indeed  of  the 
so-called  Lloyds  in  this  country  are  in  a  position  to  offer 
reliable  contracts  of  indemnity.  They  furnish  the  com- 
bined promises  of  a  number  of  private  individuals,  and 
the  value  of  the  contract  in  most  cases  is  entirely  dependent 
upon  the  financial  strength  of  these  individuals,  though  in 
a  few  instances  a  guarantee  fund  is  i)aid  in,  which  is  liable 
for  claims.  Somc^  of  these  concerns  are  responsible;  and 
have  honestly  and  promptly  paid  their  losses.  Most  of 
them,  however,  are  without  any  of  the  qualities  which  a 
company  transacting  an  insurance  business  should  possess, 
and  not  a  few  are  operated  sok^ly  in  order  to  get  possession 
of  premiums,  which  are  not  by  any  means  designed  to  be 
accumulated  for  the  benefit  of  their  foolish  patrons.     One 


V4  YALE  RiEADINGS  IN  INSURANCE 

very  frequent  feature  of  their  contracts,  which  makes 
them  without  particular  vakie  in  the  congested  sections 
of  large  cities,  is  the  provision  that  in  case  of  a  general 
conflagration  the  liability  of  each  partner  under  all  out- 
standing contracts  shall  be  limited  to  a  certain  fixed 
amount.  These  policies  are  usually  issued  through  some 
one  agent  acting  for  all  the  partners,  who,  as  a  rule,  know 
nothing  about  the  transactions  in  which  their  names  and 
credit  are  involved. 

While  these  Lloyds  are  most  of  them  new  institutions  — 
recent  phenomena  in  the  insurance  world  — •  their  opera- 
tions have  been  so  general  and  the  results  so  unsatisfactory 
to  the  public,  that  in  ten  states  laws  have  been  passed 
which  require  a  cash  deposit  or  capital  to  be  paid  in  by 
every  such  partnership  as  security  for  the  fulfilment  of 
their  contracts.  One  state  —  Pennsylvania  —  prohibits 
them  altogether.  In  seventeen  states  there  are  as  yet  no 
laws  applicable  to  them.  In  the  rest  of  the  United  States 
they  are,  by  the  wording  of  the  insurance  laws,  subject 
to  the  same  restrictions  and  requirements  as  ordinary 
insurance  companies.  There  are  from  sixty  to  seventy 
of  these  Lloyds  now  in  existence  operating  in  a  more  or 
less  general  way  in  the  United  States,  of  which  nimiber 
perhaps  less  than  half  a  dozen  are  responsible  and  worthy 
of  a  limited  recognition.  There  is  no  way  of  ascertaining 
the  volume  of  business  which  these  institutions  transact. 

We  now  come  to  the  consideration  of  the  methods  of 
incorporated  stock  companies,  which,  as  before  stated, 
form  altogether  the  most  important  class  of  insm'ance 
companies,  both  as  to  the  business  transacted  and  as 
to  sohdity  of  assets  and  reserve,  and  which  transact  90  per 
cent,  of  all  the  business  done  in  the  United  States. 
"^In  the  case  of  American  companies,  at  least,  it  is  usual 
for  the  directors  to  concern  themselves  chiefly  with  the 
financial  or  banking  department  of  the  company's  busi- 
ness, largely  because  insuring  property  against  fire  is  a 
business  requiring  technical  training  and  one  which  must 


ORGANIZATION  OF  COMPANIES  75 

be  conducted  by  men  well  versed  in  its  numerous  details. 
Therefore  the  business  of  insuring  property  is  commonly 
left  to  the  officers  of  the  company  and  their  assistants. 

The  whole  country  is  usually  divided  into  districts  or 
departments  and  an  officer,  or  more  than  one,  placed  at  the 
head  of  each.  These  departments  in  some  cases  are  all 
under  the  immediate  supervision  of  the  chief  executive 
and  located  in  the  head  office  of  the  company.  It  is 
believed  by  some  company  officers  that  a  more  consistent 
policy,  a  more  uniform  method  of  procedure  and  greater 
economy  of  operation  can  be  secured  in  this  way.  The 
majority  of  companies,  however,  establish  departments 
in  various  large  cities,  each  department  having  jurisdiction 
over  the  states  naturally  tributary  to  the  city  where  it  is 
located.  These  departments  are  usually  called  general 
agencies.  The  companies  which  maintain  them  do  so 
because  of  the  belief  that  in  this  way  they  can  get  in 
closer  touch  with  their  various  agents  and  with  the  insur- 
ing public,  and  therefore  can  secure  the  best  obtainable 
results,  both  as  to  the  amount  of  business  obtained  and 
in  the  matter  of  closely  supervising  it.  The  cities  usually 
selected  for  department  offices  are  New  York,  Chicago, 
and  San  Francisco,  and,  to  a  smaller  extent,  Boston, 
Philadelphia,  Atlanta,  New  Orleans,  and  one  or  two  others. 

The  head  office  of  the  company  contains  the  department 
for  the  states  adjacent  thereto.  These  departments  are 
intended  to  work  thoroughly  the  territory  under  their 
jurisdiction  according  to  the  general  scheme  of  operations 
adopted  by  the  company.  Some  companies  endeavor  to 
secure  business  from  the  larger  cities  only,  but,  both  for 
the  sake  of  a  larger  income  and  because  of  the  safety  and 
steadiness  which  can  only  be  secured  from  a  widely  dis- 
tributed business,  most  companies  endeavor  to  get  busi- 
ness from  all  possible  sources  where  a  profit  is  likely. 

The  business  is  secured  by  means  of  agents  residing  in 
the  various  towns  and  villages  where  the  company  operates. 
These  are  called  local  agents,     In  large  cities,  such  as 


76  YALE  READINGS  IN  INSURANCE 

Cleveland,  Rochester,  Louisville,  etc.,  these  local  agents 
usually  devote  their  entire  time  to  securing  and  handling 
the  business,  and  often  the  same  man  or  firm  in  such  a 
city  will  act  as  agent  for  anywhere  from  one  to  a  dozen 
insurance  companies.  In  the  smaller  places,  however, 
the  amount  of  business  to  be  done  is  so  small  and  the 
number  of  companies  desiring  it  so  large  that  the  business 
usually  demands  only  a  portion  of  the  agent's  time,  and 
is,  therefore,  combined  with  banking,  the  practice  of  law, 
store-keeping,  or  some  other  occupation.  Moreover,  the 
agent  in  such  little  places  acts  for  as  many  companies  as 
he  will  consent  to  represent. 

It  will  be  seen  that  local  agents  are  the  means  by  which 
a  company  comes  into  direct  contact  with  the  insuring 
public.  The  local  agents  are  the  ones  who  secure  for  the 
company  the  business  on  which  it  feeds.  They  are,  there- 
fore, a  factor  of  supreme  importance  in  the  business,  and 
companies  endeavor  through  their  special  agents  and  in 
other  ways  to  maintain  cordial  and  friendly  relations 
with  them.  In  order  to  insure  success,  popularity  with 
local  agents  is  quite  as  important  as  popularity  with  the 
public  in  general.  In  order  that  there  may  be  an  intimate 
knowledge  of  the  business  at  each  agency,  that  new  agen- 
cies may  be  secured  and  unsatisfactory  ones  discontinued, 
and  to  the  end  that  all  matters  concerning  the  transactions 
between  local  agents  and  the  department  office  may  be 
properly  supervised,  men  called  special  agents  are  em- 
ployed, whose  duty  it  is  to  travel  constantly  over  the  field 
to  which  they  are  assigned,  locating  agencies  at  all  avail- 
able points,  carefully  inspecting  and  securing  accurate 
information  concerning  all  the  risks  which  the  company 
insures,  collecting  overdue  payments,  endeavoring  to 
secure  from  local  agents  as  much  desirable  business  as 
possible,  and  in  general  to  further  the  interests  of  the 
company  in  every  legitimate  way.  To  them  also  is  assigned 
for  the  most  part  the  duty  of  arranging  with  claimants  for 
the  settlement  and  payment  of  the  losses  which  occur  in 


^ 


ORGANIZATION   OF  COMPANIES  77 

their  particular  territory,  though  some  companies  doing 
a  very  large  business  have  so  many  losses  to  settle  that 
expert  adjusters,  as  they  are  called,  are  employed  for  this 
purpose  only.  The  local  agents  are  equipped  by  the  com- 
pany with  the  various  forms,  books  of  record,  and  other 
supplies  necessary  for  the  transaction  of  business,  also 
with  blank,  unsigned  policies. 

Wlien  a  contract  is  secured  by  an  agent,  from  some 
property  owner  a  poUcy  is  at  once  filled  out,  executed,  and 
delivered  to  him,  and  as  soon  as  possible  thereafter  an 
abstract  of  this  contract,  containing  a  full  description  of 
the  property  and  all  the  details  of  the  contract,  is  made 
out  by  the  agent  on  a  blank  provided  for  that  purpose, 
called  a  "daily  report."  This  report  is  thereupon  at 
once  mailed  to  the  department  office  which  has  jurisdic- 
tion over  the  territory  in  which  the  agent  is  located,  and 
at  the  end  of  each  month  an  account  or  statement  of  all 
the  contracts  made  during  the  month  is  sent  by  the  agent 
to  the  same  department  office,  accompanied,  or  to  be 
followed,  by  a  remittance  for  the  premiums  collected. 

The  local  agent  is  compensated  by  a  commission,  usually 
15  per  cent,  on  the  amount  of  premiums  secured  or  renewed 
by  him.  He  is  presumed  and  required  to  protect  the 
interests  of  the  company  or  companies  he  represents  by 
carefully  selecting  desirable  business  and  by  following  out 
their  instructions  in  all  matters.  Companies  endeavor 
to  provide  their  agents  with  complete  instructions  as 
to  their  desires  and  methods  concerning  the  conduct  of 
business,  so  that  agents  may  properly  care  for  their  in- 
terests. 

WHien  the  daily  reports  of  policies  issued  reach  the  office 
of  the  company  they  are  carefully  examined  and  reviewed 
by  trained  men  called  examiners.  If  the  wording  of  the 
contract  (the  form,  so-called)  is  found  to  be  faulty,  if  the 
price  is  deemed  to  be  too  low,  or  if  any  other  error  is  dis- 
covered, the  agent  is  promptly  requested  to  amend  the 
contract   in    the   necessary  particular.     If   the    property 


78  YALE  READINGS  IN  INSURANCE 

insured  is  deemed  to  be  an  undesirable  subject  for 
insurance  he  is  requested  to  cancel  or  terminate  the 
contract  at  once. 

The  duties  of  the  examiner  are  extremely  important. 
They  demand  an  intimate  acquaintance  with  the  hazards 
usually  incident  to  various  kinds  of  property;  also  famili- 
arity with  the  conditions  affecting  the  district  or  town 
where  each  risk  is  located.  Moreover,  in  judging  a  risk, 
the  character  of  the  ownership,  the  nature  of  the  inherent 
and  adjacent  or  exposing  hazards  due  to  the  various 
occupants  in  the  vicinity,  the  amount  and  quality  of  the 
protection  against  fire,  the  record  of  the  locality  as  to 
fires,  the  rate,  i.e.,  price  obtained,  and  numerous  other 
factors  must  be  considered  and  investigated  with  con- 
siderable thoroughness  by  him.  To  facilitate  this  work 
the  general  offices  are  equipped  with  maps  showing  the 
construction  and  size  of  every  building  in  the  business 
districts  of  all  towns  of  importance;  also  with  commercial 
reports  indicating  the  financial  standing  and  business 
records  of  all  merchants  and  manufacturers,  inspection 
reports  of  important  risks  made  by  special  agents  and 
trained  experts  as  well,  and  various  other  tables,  books 
of  reference  and  of  rules,  which  aid  the  examiner  in  pass- 
ing judgment  upon  the  numerous  reports  which  come 
before  him.  A  successful  examiner,  however,  must  have 
a  clear  head,  quick  perceptions,  cool,  careful  judgment, 
and  a  very  considerable  knowledge  acquired  by  experi- 
ence. The  examiner  has  usually  two  or  more  assistants 
who  help  him  in  matters  of  detail. 

The  monthly  accounts  or  statements  before  referred  to 
are  also  carefully  gone  over  by  auditors  or  bookkeepers. 
When  the  work  of  examining  and  auditing  is  done,  the 
daily  reports  and  the  accounts  pass  on  into  the  hands  of 
a  large  force  of  clerks,  who  from  them  make  up  the  elab- 
orate records  and  statistics  which  the  insurance  com- 
panies are  required  to  keep,  partly  for  their  own  guidance 
and  partly  to  comply  with  the  laws  of  the  different  states. 


ORGANIZATION   OF  COMPANIES  79 

In  addition  to  the  daily  reports  and  accounts,  canceled 
policies  are  also  forwarded  in  large  numbers  by  agents 
to  the  general  offices;  also  notice  of  changes  in  contracts, 
called  indorsements.  Those  must  all  pass  through  the 
same  intricate  and  complicated  process  as  the  original 
daily  report. 

In  another  part  of  the  office  the  losses  are  handled. 
Every  loss  is  at  once  reported  to  the  general  office  in  whose 
territory  it  occurred.  It  is  then  assigned  to  the  proper 
man  for  settlement  —  usually  a  special  agent.  As  soon 
as  possible  he  visits  the  scene  of  loss  and  arranges  a  settle- 
ment with  the  property  owner.  The  completed  reports 
of  these  settlements  are  forwarded  to  the  general  office 
and  are  very  carefully  tabulated,  classified,  and  compared 
with  the  record  of  premiums  received,  the  premiums  and 
losses  of  each  class  being  grouped  by  themselves  in  order 
that  the  experience  of  the  company,  that  is,  the  profit  or 
loss  arising  from  transactions  with  each  class  of  risks, 
may  be  ascertained.  A  large  department  office  in  the 
course  of  one  year  will  receive,  perhaps,  125,000  daily 
reports  from  its  agents,  who  will  be  located  in,  say,  2500 
cities,  towns,  and  villages.  These  daily  reports  will  carry 
premiums  averaging  about  $20  each,  or  amounting  to 
$2,500,000  in  all.  Such  a  department  will  also  have  to 
adjust  and  pay  from  3000  to  4000  losses  each  year.  To 
keep  the  elaborate  records  and  tables  of  statistics  concern- 
ing all  these  transactions,  to  watch  them  throughout  the 
life  of  the  contracts,  to  collect  the  moneys  due  and  to 
pay  carefully  and  justly  the  losses  —  all  these  tasks  in- 
volve an  amount  of  detailed,  arduous,  and  technical  labor 
which  is  formidable  to  contemplate.  They  also  render 
necessary  the  services  of  well-trained  men  —  high-priced, 
many  of  them  —  and  a  very  large  expenditure  for  proper 
equipment  and  maintenance.  At  the  head  of  such  a 
department  is  a  manager,  or  general  agent,  as  he  may 
happen  to  be  called.  He  is  responsible  for  the  results 
obtained  in  the  territory  under  his  jurisdiction.     He  must 


80  YALE  READINGS  IN   INSURANCE 

see  to  it  that  the  numerous  and  troublesome  details  of 
the  general  office  work  are  kept  up,  exercise  general 
supervision  over  the  examiners  and  their  work,  direct  the 
movements  of  the  traveling  special  agents  and  inspectors, 
decide  all  important  questions  arising  in  loss  settlements, 
and  last,  but  not  least,  utilize  all  these  various  factors 
in  such  a  way  that  the  company  may  secure  its  fair  pro- 
portion of  desirable  business.  A  large  department  as 
indicated  above  will  have  on  its  rolls  from  2000  to  3000 
agents  and  perhaps  one  hundred  or  more  salaried  em- 
ployees. 

At  the  head  of  the  company  the  president  and  other 
officers  exercise  a  general  oversight  over  all  the  depart- 
ments. Usually  monthly  tabulated  reports  of  all  trans- 
actions are  made  by  the  departments  to  the  head  office. 
Any  profits  are  also  remitted  to  the  head  office  for  invest- 
ment. On  the  other  hand,  if  losses  exceed  the  receipts  of 
any  department,  advances  are  made  to  that  department. 

The  officers  are  also  charged  with  the  duty  of  deciding 
upon  the  general  policy  and  methods  of  the  company  for 
the  guidance  of  the  various  departments.  The  amounts 
for  which  liability  may  be  assumed  on  different  kinds  of 
risks  are  also  determined  by  them.  In  other  words,  the 
plan  of  campaign  is  laid  out  and  managed  by  the  officers 
and  executed  by  the  department  managers  through  their 
special  and  local  agents.  In  the  case  of  those  companies 
which  do  not  make  use  of  separate  departments  located 
in  different  parts  of  the  country,  a  large  staff  of  officers 
is  customary  at  the  head  office,  where  the  junior  officers 
perform  the  duties  usually  devolving  upon  department 
managers. 

In  the  large  cities  where  values  are  great  and  congested 
and  where  consequently  the  amount  of  business  to  be 
done  is  very  large,  another  class  composed  of  middlemen 
or  brokers,  as  they  are  called,  has  arisen.  These  men 
secure  from  property  owners  orders  for  insurance  which 
they  then  place  with  the  local  agent  and  in  return  receive 


ORGANIZATION   OF  COMPANIES  81 

a  portion,  usually  one-half  or  more,  of  the  agent's  com- 
mission. These  brokers  usually  take  entire  charge  of  the 
insurance  affairs  of  their  patrons,  acting  as  their  agents 
in  all  matters  relative  thereto.  In  New  York  City  so 
universal  is  this  method  of  transacting  business  that  there 
are  practically  no  local  agents  who  solicit  or  secure  busi- 
ness direct  from  property  owners,  and  most  companies 
maintain  their  own  offices  with  salaried  managers,  with 
whom  the  brokers  deal. 


CHAPTER  V 

RATES  AND   HAZARDS  * 

In  the  language  of  fire  insurance,  the  name  "risk"  is 
applied  to  any  piece  or  kind  of  property  which  an  insur- 
ance policy  may  cover.  The  hazards  of  a  certain  risk 
(as  for  instance  a  building),  or  of  a  certain  class  of  risks 
(such  as  flour  mills),  are  the  peculiar  or  particular  circum- 
stances or  characteristics  pertaining  to  or  affecting  it 
which  favor  or  make  for  its  destruction  by  fire.  The 
extent  to  which  these  hazards  endanger  a  given  risk  theo- 
retically governs  its  rate,  i.e.,  the  price,  per  cent.,  which 
must  be  paid  for  insurance.  A  brief  examination  of  the 
subject  of  hazards,  therefore,  will  naturally  precede  and 
lead  up  to  the  subject  of  rates. 

Hazards  may  be  divided  broadly  into  two  classes,  — 
physical  and  moral,  or  personal,  as  they  are  sometimes 
called.  The  physical  hazards  are  inherent  in  the  risk 
itself  and  in  its  surroundings.  Moral  hazards  arise  from 
personal  factors.  Physical  hazards  may  be  partially 
measured,  appraised,  estimated,  and  to  a  certain  extent 
controlled.  Moral  hazards  are  hidden,  presumed  rather 
than  known,  not  to  be  measured  or  scheduled. 

The  causes  of  fires  are  of  far  greater  variety  than  is 
commonly  known.  They  are  indeed  almost  infinite  in 
number,  for  practically  every  substance  and  almost  every 
process  of  labor,  manufacture,  or  commerce  is  under  cer- 

1  By  Richard  M.  Bissell,  Vice-President  of  the  Hartford  Fire  Insurance 
Company,  Hartford.  Reprinted  from  pages  92-126  of  the  Yale  Insur- 
ance Lectures,  Fire  and  Miscellaneous. 

82 


RATES  AND  HAZARDS  83 

tain  circumstances  or  in  certain  relations  to  other  articles 
or  processes  productive  of  danger  from  fire. 

Physical  hazards  may  be  divided  into  two  classes,  as 
external  and  internal,  which  are  sufficiently  distinguished 
by  their  names.  The  external  hazards  include  lightning, 
conflagrations,  sparks,  bonfires,  forest  and  prairie  fires 
(which  are  sometimes  very  serious  hazards),  and  exposure, 
the  greatest  of  which  by  far  is  exposure,  —  i.e.,  the  danger 
to  which  a  risk  is  subject  from  the  burning  of  other  risks 
or  substances.  To  this  cause  is  due  28  per  cent,  of  all 
losses,  both  as  to  number  and  value.  Property  valued  at 
$50,000,000  was  destroyed  by  exposure  fires  in  1902.  We 
speak  of  exposures  as  a  hazard  and  attribute  28  per  cent, 
of  all  losses  to  exposure,  meaning  thereby  that  as  to  28 
per  cent,  of  all  risks  that  are  destroyed  or  damaged,  the 
losses  are  caused  by  fires  the  origin  of  which  is  exterior 
to  the  risks  embraced  in  the  28  per  cent.  It  is  an  obvious 
truth,  however,  that  the  original  cause  of  an  exposure  loss 
is  usually  to  be  found  in  some  physical  hazard  and,  or- 
dinarily, an  internal  physical  hazard  pertaining  to  an  ad- 
jacent risk.  The  following  general  rule  may  be  laid  down: 
The  degree  of  exposure  hazard  to  which  any  risk  is  subject 
is  determined,  first,  by  its  own  combustibility  and  igniti- 
bility,  i.e.,  the  readiness  with  which  it  will  ignite  and  the 
rapidity  and  completeness  with  which  it  may  be  destroyed 
by  fire;  second,  by  the  distance  which  separates  it  from 
the  buildings  or  substances  from  which  the  exposure 
hazards  arise;  third,  by  the  inherent  hazards  of  the  risks 
adjacent  to  it  or  within  biu'ning  distance,  and  fourth,  by 
the  extent  of  protection  which  it  receives  from  water  works, 
fire  department,  or  private  apparatus.  Under  especially 
dangerous  conditions  thei'e  is  hardly  any  limit  to  the  burn- 
ing distance.  In  the  summer  of  1894,  dui'ing  a  tlrought, 
accompanied  by  high  winds,  there  were  extensive  forest 
fires  in  northern  Wisconsin  and  Michigan,  and  risks  were 
burned  by  exposure  arising  from  fires  twenty  miles  or 
more  distant.     Sparks  and  embers  fell  on  the  decks  of 


84  YALE  READINGS  IN  INSURANCE 

vessels  many  miles  from  land  on  Lake  Superior.  The  ex- 
posure hazard  constitutes  a  factor  in  the  total  of  a  risk's 
hazards,  which  is  highly  susceptible  to  reduction  by  effi- 
cient fire  protection.  In  case  of  frame  mercantile  buildings, 
it  frequently  constitutes  the  most  important  factor  in 
determining  the  rate. 

The  most  important  of  the  external  hazards  are,  in  their 
order,  —  after  exposure,  sparks,  which  cause  about  4  per 
cent,  of  the  entire  number  of  fires  (locomotive  sparks  alone 
caused  over  600  out  of  1500  cotton  fires  during  1902,  of 
which  the  average  loss  amounted  to  over  $5000),  and 
lightning,  which  is  responsible  for  nearly  3  per  cent,  of  all 
losses,  or  thi-ee  and  a  half  millions  in  1902. 

The  internal  hazards  are  much  more  numerous  and, 
leaving  out  exposure,  much  more  productive  of  fires.  They 
may  be  sub-divided  into  five  classes,  which,  however,  are 
not  absolutely  distinct.  The  first  class,  according  to  our 
arbitrary  division,  is  spontaneous  combustion.  This,  while 
ordinarily  not  an  imminent  hazard,  becomes  one  whenever 
vegetable  or  animal  fiber  is  handled  or  stored,  as  in  cotton 
and  woolen  mills,  cotton  warehouses,  ice  houses,  etc.  It 
is  a  characteristic  of  these  substances  when  more  or  less 
saturated  with  any  oily  substance  (more  especially  if  it 
be  an  animal  oil  or  grease),  that  rapid  oxidation  or  spon- 
taneous combustion  ensues.  Two  hundred  and  three  out 
of  1683  fires  in  cotton  mills,  and  151  out  of  1630  fires  in 
woolen  mills,  were  due  to  this  cause. 

The  next  general  division  comprises  the  hazards  due  to 
the  operation  of  machinery.  These  include  friction  of 
machinery,  heated  bearings,  accidents  and  breakages, 
overheated  boilers  and  stacks  adjacent  to  inflammable 
substances,  and  the  presence  of  foreign  substances  in  fast- 
nmning  machinery.  For  example,  in  the  pickers  used  in 
cotton  and  woolen  mills  and  in  cotton-ginning  machines, 
sparks  caused  by  the  presence  of  stones,  buttons,  car- 
tridges, etc.,  caused  a  great  many  fires.  In  cotton  mills, 
984  out  of   1683  fires  were  caused  by  friction  and   the 


RATES  AND   HAZARDS  85 

presence  of  foreign  substances  in  machinery,  and  in  flour 
mills,  477  out  of  2616  fires  were  caused  by  friction  in 
machinery. 

The  third  division  comprises  the  hazards  incident  to 
processes.  Among  these  are  hazards  arising  from  dry 
kilns,  roasting  furnaces  or  ovens,  use  of  inflammable  mix- 
tures for  painting  or  japanning,  the  compounding  of  com- 
bustible and  explosive  chemicals  in  drug  and  paint  mills, 
the  improper  or  careless  handling  of  heated  substances, 
such  as  molten  metals  or  the  dried  fertilizer  just  from  the 
dry  kilns,  the  use  of  fire  heat  under  kettles,  etc.,  and  the 
production  of  various  explosive  gases  or  mixtures,  as,  for 
instance,  dust  in  flour  mills  and  starch  factories  or  benzine 
vapor  in  furniture  factories  or  japanning  ovens. 

The  fourth  and,  so  far  as  the  number  of  losses  and  value 
of  property  are  concerned,  by  far  the  most  important  of 
internal  physical  hazards,  is  due  to  the  various  processes 
and  kinds  of  apparatus  used  for  purposes  of  heating  and 
lighting.  It  is  quite  natural  that  the  process  of  heating 
—  which  usually  means  the  actual  use  of  fire  — should 
make  more  losses  than  any  other  cause,  yet  it  is  a  sad  com- 
mentary on  American  methods  of  building,  and  on  Ameri- 
can laws  concerning  building,  that  defective  flues  should 
be  responsible  for  twice  as  many  fires  as  any  other  one 
physical  or  known  moral  hazard.  This  cause  also  is  re- 
sponsible for  a  greater  property  loss  than  any  other.  Flues 
may  be  defective  in  construction,  as  when  wooden  joists 
or  timbers  are  allowed  to  pierce  their  walls,  or  when  un- 
protected holes  are  left  by  careless  masons,  through  which 
sparks  or  flames  may  escape.  They  may  become  defec- 
tive by  settling  or  cracking,  due  to  insufficient  support, 
or  because  the  building  is  moved  or  shaken  in  consequence 
of  a  tornado  or  wind  storm  or  if  struck  by  lightning.  In 
1902  over  14,000  fires,  or  13  per  cent,  of  tlie  total  number 
of  fires,  were  attributed  to  defective  flues,  and  the  total 
property  loss  resulting  was  over  $11,000,000.  Other  fires 
due  to  methods  of  heating  were  caused  by  hot  ashes  and 


86  YALE  READINGS  IN  INSURANCE 

coals  improperly  deposited  in  dangerous  places  (barrels  for 
example),  or  through  carelessness  or  defective  apparatus 
allowed  to  come  in  contact  with  combustible  substances. 
Still  other  fires  were  caused  by  hot  stoves  and  furnace  pipes 
and  by  overheated  stoves  and  furnaces,  and  the  list  in- 
cludes the  fires  caused  by  steam  pipes  passing  through  or 
adjoining  unprotected  wooden  surfaces.  In  all,  about 
20  per  cent,  of  the  total  number  of  fires  are  directly  trace- 
able to  the  use  of  fire  for  heating  purposes. 

The  fires  due  to  methods  of  illumination  included  in 
1902  over  400  caused  by  candles,  over  3700  from  accidents 
to  lamps,  resulting  in  more  than  $2,000,000  of  losses,  970 
from  gas  jets,  and  over  1000  from  electric  wires,  which  are 
classed  with  the  methods  of  illumination  for  convenience, 
though  electric  wires  are  often  used  to  convey  power.  The 
losses  due  to  the  use  of  electricity  are  larger  by  far  in  amount 
than  those  due  to  any  of  the  other  means  of  illuminating, 
chiefly,  no  doubt,  because  electricity  is  now  so  generally 
used  in  buildings  and  localities  where  large  values  are  col- 
lected, while  candles,  lamps  and  even  gas  are  now  prin- 
cipally used  in  dwellings,  small  stores,  and  small  factories; 
furthermore,  fires  of  electrical  origin  are  often  not  dis- 
covered until  they  have  gained  considerable  headway. 
The  value  of  property  destroyed  by  fires  of  electrical  origin 
in  1902  was  $12,000,000.  Fu-es  due  to  other  methods  of 
illumination  were  more  than  four  times  as  numerous  as  the 
fires  of  electrical  origin,  yet  the  ensuing  loss  was  slightly 
below  $5,000,000  or  less  than  one-half  the  amoimt  due  to 
use  of  electricity. 

The  fifth  general  division  of  internal  hazards  includes 
everything  not  already  classified.  The  various  fires  due 
to  accidents  and  carelessness  find  a  place  here.  The  list 
includes  oil  stove  accidents,  fires  from  matches,  which 
caused  in  1902,  4000  fires,  with  a  loss  of  over  one  and  a  half 
millions  of  dollars,  children  playing  with  fire,  cigars,  ciga- 
rettes and  tobacco  pipes,  with  a  record  of  1100  fires  in 
1902,  and  the  numerous  other  causes  of  comparatively 


RATES  AND  HAZARDS  87 

smaller  importance  which  have  not  already  found  men- 
tion. 

All  of  these  classes  and  sub-classes  of  hazards  might  still 
be  almost  indefinitely  re-subdivided,  for  new  hazards  and 
new  manifestations  of  old  hazards  are  to  be  met  with  daily. 
If  the  causes  of  the  76,000  fires  which  occurred  in  1902 
could  be  ascertained  with  accuracy,  each  would  be  found 
to  differ  in  some  respects  from  every  other.  When  all 
ascertainable  hazards  have  been  classified  and  the  causes 
for  fire  set  forth  so  far  as  we  can  ascertain  them,  there 
yet  remains  about  16  per  cent,  of  all  fires  for  which  the 
causes  cannot  be  discovered.  It  is  not  strange  that  the 
causes  of  many  fires  escape  detection.  In  the  first  place 
many  incendiary  fires,  if  fully  successful,  destroy  all  traces 
of  origin.  The  same  is  true  of  fires  caused  by  electric 
wires,  defective  flues,  spontaneous  combustion,  sparks, 
and  many  other  obscure  or  hidden  causes.  In  fact,  when- 
ever fires  acquire  such  proportions  before  their  discovery 
as  to  prevent  subsequent  inspection  of  the  points  of  origin, 
or  when  the  amount  of  destruction  is  sufficient  to  obliterate 
any  indication  of  the  cause  (in  cases  when  the  origin  is  not 
witnessed)  that  cause  will  usually  remain  a  mystery.  It 
will  be  readily  seen  that  this  very  considerable  percentage 
of  fires  of  unknown  origin  renders  anything  like  an  exact 
estimate  of  the  effect  of  the  various  hazards  impossible, 
and  one  of  the  difficulties  of  making  a  scientific  and  accu- 
rate apportionment  of  rates  is  therefore  at  once  obvious. 

The  foi-egoing  nuist  be  considered  to  be  merely  a  rough 
general  index  of  the  numerous  heads  included  in  the  very 
important  subject  of  physical  hazards.  As  the  profession 
of  fire  underwriting  progresses  and  develops,  the  investi- 
gation and  safeguarding  of  these  hazards  is  more  and  more 
passing  into  the  hands  of  experts,  and,  indeed,  the  subject 
is  one  sufficiently  comprehensive  and  complex  to  afford  a 
life  work  to  students  of  the  best  technical  training. 

In  this  discussion  we  must  now  pass  on  to  the  considera- 
tion of  the  other  grand  division  of  hazards,  usually  called 


88  YALE  READINGS  IN   INSURANCE 

moral  hazards.  Moral  hazards  arise  from  the  personal 
(including  the  financial)  circmiistances  which  affect  risks. 
They  are  indefinite,  incapable  of  analysis,  separation,  or 
estimation,  yet  they  are  of  the  greatest  importance  in  fire 
insurance.  Some  authorities  believe  that  more  fires  are 
attributable,  directly  or  indirectly,  to  moral  or  personal 
causes  than  to  physical,  and,  while  any  such  attempt  to 
estimate  the  results  of  moral  hazards  must  be  largely 
conjectural,  it  is  quite  certain  that  they  are  accountable 
for  a  very  large  percentage  of  the  fire  waste.  Moral 
hazard  is  said  to  exist  in  regard  to  a  particular  risk  when- 
ever a  benefit,  real  or  supposed,  direct  or  indirect,  would 
ensue  to  any  one,  especially  the  owner,  by  reason  of  the 
destruction  of  the  insured  property;  also,  and  nearly  as 
important,  whenever  for  any  reason  no  one  has  a  strong 
interest  in  its  preservation. 

In  other  words,  not  only  the  desire  to  destroy,  but  also 
the  lack  of  a  strong  desire  to  preserve,  creates  moral 
hazard,  so  called,  and  it  is  hard  to  say  which  condition 
is  the  more  dangerous.  The  prospect  of  a  profit  from  fire 
or  the  absence  of  a  financial  incentive  to  preserve  a  risk 
make  it  impossible  for  an  insurance  company  to  rely  upon 
the  exercise  of  that  due  care  and  diligence  for  its  protection 
which  is  essential,  if  business  is  to  be  transacted  at  a  profit. 

There  are  various  ways  in  which  moral  hazards  may 
arise  which  can  be  named  and  described.  The  possibility 
of  their  occurrence  is  patent  to  every  one  as  soon  as  they 
are  named,  but  to  find  out  or  know  in  advance  that  any 
of  them  exist  in  connection  with  a  given  risk  is  often  be- 
yond our  powers.  Hence  losses  due  to  such  causes  can- 
not be  avoided.  Any  cause  which  seriously  injures  the 
value  of  a  risk  or  diminishes  its  productivity  is  likely  to 
create  moral  hazard,  if  the  risk  be  well  covered  by  insur- 
ance. Therefore  insurance  companies  avoid  risks  where 
for  any  reason  there  is  doubt  as  to  value  or  productivity, 
—  summer  hotels  which  have  not  succeeded,  buildings 
which  are  likely  to  be  condenmed,  mines  where  paying 


RATES  AND  HAZARDS  89 

quantities  of  ore  have  not  been  found,  flour  mills  where  the 
water  power  has  failed,  etc.  All  of  these  are  pertinent 
examples.  Any  man  would  prefer  money  equal  to  the 
cost  of  such  properties  to  the  properties  themselves.  So, 
too,  experimental  properties,  —  temporary  branch  stores 
and  new  ventures  of  every  description  which  have  not 
demonstrated  their  earning  power,  must  be  handled  with 
greatest  caution.  The  mere  fact  that  capital  has  been 
invested  does  not  always  indicate  that  value  exists,  and 
the  rule  of  prudence  and  of  indemnity  as  well,  viz.,  "no 
profit  to  the  assured  from  fire,"  points  the  way  to  the  wise 
rejection  of  risks  where  this  question  of  value  is  involved. 
Such  risks  are  not  only  Hkely  to  be  wilfully  fired  by  a  dis- 
honest insured  owner,  but,  even  in  the  hands  of  honest 
men,  are  not  likely  to  receive  that  assiduous  care  and  watch- 
fulness which  men  give  to  their  successful  enterprises. 
Indifference  and  carelessness  differ  only  in  degree  from 
the  actual  desire  for  the  destruction  of  property  so  far  as 
the  probability  of  its  accomplishment  is  concerned. 

In  view  of  the  considerations  mentioned  above,  insurance 
companies  look  with  disfavor  upon  those  risks  where  the 
amount  of  insurance  carried  exceeds  the  value  of  the  prop- 
erty and  are  inclined  to  fear  a  moral  hazard  in  connection 
with  them.  It  goes  without  saying  that  such  a  condition 
would  be  dangerous  where  the  owner  is  dishonest,  and  where 
he  is  honest  the  fact  that  no  personal  loss  can  come  to 
him  from  a  fire  is  likely  to  induce  that  carelessness  and  lack 
of  precaution  which  constitute  one  species  of  moral  hazard. 

Financial  embarrassment  and  the  pressing  necessity  for 
ready  cash  often  create  the  most  serious  kind  of  moral 
hazard.  A  merchant  with  notes  overdue  or  who  sees  failure 
ahead,  or  a  farmer  who  cannot  pay  interest  on  his  mort- 
gage, is  often  in  a  position  where  the  ready  money  obtain- 
able from  his  insurance  poli(;ies,  even  if  not  equal  to  the 
value  of  his  property,  woukl  nevertheless  help  him  tide 
over  a  pressing  emergency. 

Another    situation    which    frequently    involves    moral 


90  YALE  READINGS  IN  INSURANCE 

hazard  is  when  property  of  any  kind  becomes  involved  in 
litigation  or  where  there  is  dispute  as  to  ownership.  In 
such  cases  divisible  cash  is  much  more  available  than  prop- 
erty which  must  be  liquidated,  and  everybody  interested 
might  well  be  benefited  by  a  fire  which  would  simplify  the 
settlement  of  a  dispute.  Moreover,  the  enmities  aroused 
in  the  course  of  litigation  are  themselves  a  source  of  danger. 

The  foregoing  remarks  apply  to  moral  hazards  which 
arise  in  connection  with  the  owners  of  property,  but  there 
are  species  of  moral  hazard  which  do  not  involve  acts  or 
neglect  of  the  owner,  but  spring  from  the  acts  or  desires 
of  others.  These  chiefly  arise  from  the  ill-will  of  those  to 
whom  the  property  owner  or  his  property  is  in  some  way 
objectionable,  or  who  have  been  or  are  likely  to  be  injured 
by  the  nature  of  the  property  itself  or  the  kind  of  work 
carried  on  therein.  Any  building,  such  as  a  fertilizer 
factory,  contagious  hospital,  dance  hall  or  saloon,  which 
interferes  with  the  peace  and  enjoyment  of  a  neighbor- 
hood or  hurts  the  value  of  surrounding  property,  offers  a 
constant  temptation  to  those  who  may  be  injured  by  it. 
Its  destruction  would  be  a  distinct  benefit  to  them.  Simi- 
larly, any  property  owner  whose  disposition  and  practices 
are  such  as  to  make  numerous  and  bitter  enemies  is  likely 
to  feel  the  results  of  the  hostility  thus  aroused  through 
the  burning  of  his  property. 

It  will  be  seen  from  the  preceding  pages  that  the  ele- 
ments which  go  to  make  up  hazards  to  which  insured  prop- 
erty is  subject  are  numerous,  complicated,  and  varied.  We 
will  now  endeavor,  briefly,  to  survey  the  methods  used 
by  insurance  companies  to  measure  these  hazards,  i.e.,  to 
fix  rates  or  prices. 

Moral  hazards  may  be  dismissed  at  the  outset;  the)"" 
cannot  be  measured  or  charged,  for  usually  they  cannot 
be  ascertained  till  after  a  fire.  Their  existence,  however, 
greatly  increases  the  fire  waste  and  is  responsible  for  the 
greater  part  of  what  are  known  as  basis  rates,  to  be  later 
described,  i.e.,  the    irreducible    foundation,  incapable  of 


RATES  AND  HAZARDS  91 

analysis,  upon  which  all  systems  and  every  schedule  of 
rates  are  based. 

In  the  early  part  of  this  course  the  principle  was  laid 
down  that  fire  insurance  is  a  tax,  —  a  tax  levied  for  a 
specific  purpose,  —  to  repair  the  fire  waste.  All  agree  that 
taxes  are  necessary  evils,  but  there  is  anything  but  unanim- 
ity as  to  methods  for  imposing  and  collecting  them.  No 
other  function  of  government  causes  such  bitter  debate, 
acrimonious  dispute,  public  clamor,  and  individual  dis- 
content as  this  matter  of  taxes.  There  is  perhaps  no  other 
obligation  resting  upon  citizens  that  is  so  constantly  and 
ingeniously  evaded. 

Now  it  is  by  means  of  a  graduated  scale  of  rates  or 
charges  that  insurance  companies  collect  the  enormous 
sums  required  to  recoup  the  provident  among  the  losers 
by  fire,  and  there  is  the  same  diversity  of  opinion,  almost 
the  same  intensity  of  debate,  among  those  who  devise 
these  rates  as  exists  between  protectionists,  free-traders, 
and  single  tax  theorists.  Moreover,  from  the  public  which 
is  taxed  arises  the  same  clamors  of  discontent,  the  same 
charges  of  inconsistency,  the  same  endeavors  to  lessen  the 
individual  burden,  which  are  to  be  noted  in  the  process  of 
collecting  ordinary  taxes,  and  too  often,  as  in  the  case  of 
such  taxes,  these  complaints  have  some  reasonable  founda- 
tion. Also,  as  in  the  case  of  ordinary  taxes,  it  frequently 
happens  that  the  most  clamorous  objectors  and  the  most 
enterprising  in  securing  relief  are  to  be  found  among  that 
number  who,  if  the  truth  were  known,  are  taxed  at  too 
low  a  rate  rather  than  too  high.  From  the  very  nature  of 
things  these  clamors  and  this  discontent  are  inevitable, 
though  as  the  process  of  making  rates  becomes  more  and 
more  scientific  and  therefore  moi"e  equitable,  we  may  hope 
that  both  the  discontent  and  the  reason  for  it  may  be 
gi'eatly  lessened.  That  there  is  some  ground  for  the  discon- 
tent, all  underwriters  will  agree,  for  the  task  of  apportioning 
with  absolute  correctness  and  fau-ness  the  fire  loss  among 
the  various  classes  of  risks  and  to  each  individual  of  a 


92  YALE  READINGS  IN  INSURANCE 

class,  according  to  the  hazard  of  each,  is  an  absolutely 
impossible  one.  Even  to  approximate  fairness  is  enor- 
mously difficult.  This  is  partly  because  of  the  absence  of 
reliable  data  and  the  unpossibility  of  obtaining  them. 
There  are,  broadly  speaking,  no  constant  factors  in  the 
rating  problem.  In  life  insurance,  rates  to-day  are  fre- 
quently based  upon  a  mortality  table  constructed  from 
the  experience  of  seventeen  companies  in  1838,  and  these 
tables  are  still  found  to  be  substantially  reliable,  but 
there  are  no  unchanging  mortality  tables  in  fire  insurance 
experience. 

■-"-The  proper  basis  for  a  table  of  rates,  constructed  on 
scientific  principles,  might  well  be  thought  to  be  the  com- 
bined experience  of  a  number  of  companies  carrying 
similar  classes  of  hazards  during  a  period  sufficiently  long, 
and  over  a  field  sufficiently  wide,  to  justify  generalization. 
Such  data  have  been  hitherto  unobtainable  for  various 
reasons,  viz.;  lack  of  uniform  system  of  classification,  lack 
of  cooperation  owing  to  the  furiously  competitive  con- 
ditions under  which  the  business  is  carried  on,  and  finally 
and  chiefly,  the  difficulty  of  properly  classifying  those  most 
numerous  losses  which  result  from  fires  communicated 
from  one  building  to  another,  known  as  exposure  losses, 
and  those  other  numerous  losses,  the  causes  of  which  are 
unknown.  Even  were  the  necessary  data  obtainable  and 
could  they  be  properly  segregated,  their  value  as  bases 
for  rate  tables  might  be  open  to  question.  In  the  last 
analysis  the  basis  for  the  rate  on  any  risk  must  be  largely 
determined  by  the  hazards,  i.e.,  possible  causes  of  fire, 
inherent  in  risks  of  the  class  to  which  it  belongs.  For 
example,  the  rate  on  a  flour  mill  must  be  based  upon  the 
known  dangers  inherent  to  all  flour  mills,  with  such  ad- 
ditions or  subtractions  as  the  peculiarities  of  the  individual 
mill  may  make  proper;  but  during  the  last  forty  years 
the  process  of  milling  flour  has  been  revolutionized;  in- 
stead of  the  old  heavy  millstones  revolving  slowly,  we  now 
have  small  steel  rollers  operated  at  a  very  high  speed. 


RATES  AND  HAZARDS  93 

Formerly,  owing  to  the  imperfect  apparatus  used,  flour  mills 
were  so  filled  wdth  dust  that  the  au*  in  them  was  very  like 
a  dry  fog,  impenetrable  to  the  eye  in  many  parts  of  the 
mill.  This  dust  was  inflammable  to  the  extent  of  being 
explosive.  The  best  modern  mills  contain  machinery 
which  practically  eliminates  dust.  It  would  be  hardly 
too  much  to  say  that  all  processes,  from  the  time  the 
wheat  enters  the  mill  till  the  flom-  is  packed  in  bags  or 
barrels,  differ  from  those  in  vogue  forty  years  ago.  Prob- 
ably it  would  also  be  within  the  bounds  of  truth  to  say 
that  each  year  brings  a  new  change  in  some  part  of  the 
machinery  or  process.  What  is  true  of  flour  milling  is  true 
of  most  other  manufacturing  industries.  One  of  the  causes 
of  the  success  of  American  manufacturers  has  been  their 
willingness  to  discard  old  machines  long  before  they  are 
worn  out  for  new  ones  better  designed  for  their  work, 
while  foreigners  cling  to  their  old  machines,  both  from 
unwillingness  to  change  and  from  motives  of  false  economy. 
A  flourishing  rubbish  heap  is  often  a  sign  of  real  progress. 

Again,  the  various  processes  and  machines  which  have 
come  into  existence  in  the  effort  to  make  valuable  the 
waste  product  of  various  industries  have  entirely  altered 
the  nature  of  many  factories.  For  instance,  in  the  case 
of  packing  houses,  —  in  addition  to  the  work  for  which 
such  buildings  were  originally  designed,  viz.  — -  the  slaugh- 
tering, cutting,  curing  and  keeping  of  beef,  pork,  ham, 
sausage,  etc.,  there  have  been  added  the  manufacture  of 
fertilizer,  of  cooked,  canned  meats  and  vegetables,  the 
manufacture  of  medicinal  extracts,  and  other  processes 
too  numerous  to  mention,  each  of  which  brings  a  new 
hazard  to  be  estimated  and  accounted  for  in  the  rate. 

Furthermore,  there  arc  certain  changes  in  methods  of 
heating  and  lighting  and  of  using  power,  involving  the  use 
of  gasoline,  electricity,  etc.,  which  have  greatly  altered 
and  are  constantly,  to  a  large  extent,  altering  the  hazards 
of  the  buildings  where  they  are  used.  Every  new  machine, 
every  new  process,  makes  a  change  in  the  sum  total  of 


94  YALE  READINGS  IN   INSURANCE 

hazards  and  therefore  the  carefully  collected  data  showing 
the  experience  on  any  particular  class  of  risks  may  at  any 
time,  by  the  invention  of  new  machinery  or  by  the  discovery 
of  a  new  process,  chemical  or  otherwise,  be  rendered  abso- 
lutely valueless,  and  the  underwriter  may  be  compelled 
to  make  new  rates  to  cover  hazards  which  have  not  en- 
dured long  enough  to  furnish  any  experience  whatsoever. 

Difficult  as  the  accumulation  of  proper  data  and  the 
ascertainment  of  the  fire  cost  of  each  class  might  be,  and 
despite  the  necessity  for  frequent  revision  and  reconstruc- 
tion, owing  to  the  changing  nature  of  the  factors  involved, 
insurance  companies  might  well  undertake  the  task  and 
endeavor  to  ascertain  more  closely  the  necessary  basis  of 
fire  cost  for  each  class  of  business  as  a  foundation  upon 
which  to  build  a  proper  system  of  rates,  were  it  not  for 
the  hostility  of  legislatures,  and  of  the  people  as  well,  to 
any  kind  of  combined  or  associated  endeavor  to  fix  or  main- 
tain such  rates.  Such  hostility,  we  must  hold,  arises  from 
a  failure  to  comprehend  the  true  nature  of  insurance,  and 
the  further  failure  to  apprehend  the  principle  that  a  properly 
constituted  rate  is  chiefly  made  up  of  factors  which  are 
not  in  the  control  of  underwriters  and  which  cannot  be 
correctly  ascertained  and  formulated  by  them  except 
through  associated  effort  and  combined  experience.  The 
attempt  to  cure  inequalities  and  injustices  which  occur  in 
the  making  of  rates  by  legal  process  springs  from  the  same 
mental  astigmatism  which  induces  men  to  attempt  by 
law  to  prevent  fluctuations  in  the  purchasing  value  of 
silver  or  of  any  other  connnodity.  Fair,  equitable,  and 
adequate  rates  are  a  prime  necessity,  not  only  for  insurance 
companies,  but  for  the  insuring  public,  for  in  the  long  run 
the  premium  income  must  pay  the  losses.  In  other  words, 
adequate  security  demands  adequate  rates.  Impairment 
of  security,  an  undoubted  loss  to  policy-holders,  must 
result  from  inadequate  rates. 

The  foregoing  remarks  apply  to  the  difficulties  which 
attend  the  making  of  proper  rates  for  various  classes,  but 


RATES   AND   HAZARDS  95 

even  greater  difficulties  are  met  when  the  attempt  is  made, 
as  it  must  be  made,  to  fix  an  appropriate  rate  for  each 
individual  of  a  class.  In  life  insurance  no  such  differentia- 
tion is  attempted.  Every  man  insured  at  age  twenty-nine 
under  the  same  kind  of  contract  pays  the  same  rate,  and 
it  is  assumed  that  every  insurable  life  at  age  twenty-nine  has 
the  same  expectation.  In  fire  insurance,  however,  no  two 
risks  are  exactly  alike  and  every  detail  of  every  risk  must 
be  examined  and  its  contribution  to  the  total  hazards  of 
the  risk  estimated.  Moreover,  in  fire  insurance  many,  if 
not  most  risks,  undergo  frequent  changes  and  must  there- 
fore be  re-examined  and  re-rated  from  time  to  time.  It  is 
this  necessity  for  determining  the  proper  charges  and  allow- 
ances for  the  numerous  differences  which  characterize  the 
construction,  occupancy,  location  and  exposure,  methods 
of  heating  and  lighting  and  extent  of  fire  protection,  not 
only  for  every  class  of  risks,  but  also  for  every  individual 
of  each  class,  which  constitutes  the  greatest  practical 
difficulty  to  be  overcome  in  making  a  fair  assessment  of  the 
fire  cost. 

Without  trying  to  investigate  the  history  of  the  various 
methods  of  classification  which  have  characterized  the 
business,  or  to  give  any  account  of  the  differing  processes 
for  making  rates  which  have  been  attempted  from  time 
to  time  by  insurance  companies,  interesting  and  instructive 
as  those  subjects  are,  we  will  now  proceed  to  take  up  a  few 
of  the  systems  and  methods  by  which  rates  are  to-day  made. 

Rates  may  be  said  to  be  made  to-day  by  two  processes: 
First,  by  what  is  known  as  the  personal  inspection  or  judg- 
ment rate  system;  and,  second,  by  carefully  prepared  and 
more  or  less  scientific  schedules. 

The  judgment  system  of  rating  is  rapidly  giving  way 
before  the  use  of  highly  complex  and  specialized  schedules. 
It  is  open  to  serious  and  obvious  criticism,  yet  has  in  times 
past  served  a  very  useful  purpose  and  is  not  without  its 
good  features.  A  few  words  will  sufficiently  describe  it. 
By  means  of  a  more  or  less  complete  system  of  classifica- 


96  YALE  READINGS  IN   INSURANCE 

tion,  companies  ascertained  in  a  rough  way  the  average 
cost  of  many  kinds  of  risks,  and  this  information  was  put 
into  the  hands  of  their  special  agents  or  gradually  absorbed 
by  them  in  the  course  of  their  work.  Formerly  special 
agents  did  practically  all  of  the  work  of  making  rates  in 
company  with  local  agents.  When  a  town  was  to  be 
rated,  these  average  cost  figures  were  used  as  basis  or  foun- 
dation rates.  Usually  towns  were  rated  by  committees  of 
from  two  to  five  special  agents  who  acted  for  all  companies. 
No  rule  or  regular  method  of  procedure  governs  the  making 
of  rates  under  this  system.  The  rates  so  made  simply 
indicate  the  opinion  or  judgment  of  the  rate-makers.  Little 
attempt  was  made  to  analyze  the  factors  which  deter- 
mined the  judgment  of  the  committee  as  to  each  risk. 
Nevertheless,  since  that  judgment  was  usually  the  result 
of  the  experience  and  observation  of  many  years  spent  in 
such  work,  the  rates  made  were  in  many  cases  quite  satis- 
factory and  equitable  to  a  moderate  degree.  No  attempt 
was  made  to  take  account  of  minor  differences,  but  all  good 
features  or  defects  of  construction  and  exposure,  and  also 
all  the  hazards  of  occupancy  and  processes,  were  lumped 
together,  and  if,  as  a  whole,  to  the  mind  of  the  raters,  they 
were  sufficient  to  appreciably  differentiate  the  particular 
risk  from  the  average  risk  of  its  class,  a  penalty  was  added 
to,  or  an  allowance  was  made  from,  the  average  rate  which 
experience  had  shown  to  be  about  adequate. 

Such  a  system  was  fairly  satisfactory  during  the  years 
when  buildings  as  a  rule  were  in  point  of  construction  very 
much  alike,  but  with  the  growth  of  improved  methods  of 
building,  and  with  the  increase  and  improvement  of  the 
apparatus  for  protection  against  fire,  to  say  nothing  of  the 
great  changes  in  business  methods,  such  a  system  fails  to 
discriminate  properly  between  risks  of  the  same  class  which 
may  differ  widely  in  many  important  respects.  Moreover, 
the  personality  of  the  raters  under  the  old  system  was  a 
highly  important  factor  —  to  such  an  extent,  in  fact,  that 
different  committees  might  produce  quite  different  results 


RATES  AND  HAZARDS  97 

when  rating  identical  risks.  The  system  of  schedule  rating 
which  attempts  to  take  into  account  the  various  features 
of  construction,  exposure,  internal  hazards,  and  protec- 
tion against  fire,  which  are  peculiar  to  each  risk,  obviates 
these  objections,  though  itself,  as  will  be  shortly  seen,  open 
to  criticism  of  another  nature. 

As  already  hinted,  no  perfect  system  of  apportionment 
of  the  fire  tax  can  be  devised.  On  the  whole,  the  system 
by  schedules  applicable  to  each  class  gives  promise  of 
development  into  a  means  of  fixing  rates  which  will  be 
much  more  equitable  and  satisfactory  than  any  other 
method  which  has  yet  been  followed,  and  there  is  reason 
for  hope,  with  more  perfect  statistics  and  a  better  appre- 
ciation of  the  relative  potentialities  of  the  different  hazards, 
that  the  various  schedules  will  ultimately  develop  until 
they  come  to  be  universally  recognized  by  the  public,  as 
well  as  insurance  officials,  as  satisfactorily  solving,  so  far 
as  it  may  be  solved,  the  complex  problem  involved  in 
making  rates. 

In  the  early  days  of  insurance  history  two  rates  only 
were  known,  —  one  for  buildings  of  brick  construction, 
another  for  frame,  and  these  rates  applied  regardless  of 
occuj^ancy.  Gradually,  as  the  hazards  of  the  different 
kinds  of  business  came  to  be  appreciated,  a  system  of 
classification  was  begun  which  has  been  growing  and  en- 
larging until  to-day,  nor  has  its  growth  or  enlargement  by 
any  means  reached  its  limit.  At  the  present  time  many 
companies  divide  their  risks  into  over  a  hundred  classes 
and  further  sub-divide  each  class  according  to  construc- 
tion, i.e.,  whether  brick  or  frame,  and  according  to  the  class 
of  the  town  or  city,  viz.,  whether  protected  or  unprotected, 
in  which  the  particular  risk  may  be  located.  From  their 
experience  with  these  classes  approximations  are  made 
by  companies  of  the  actual  average  cost  of  insuring  each 
class,  but  in  order  to  fix  the  prices  for  the  individuals  of  a 
class  there  is  required  a  mass  of  diagrams,  statistics,  and 
other  data,  showing  the  particular  features  of  each  risk, 


98  YALE  READINGS  IN   INSURANCE 

which  are  ahiiost  infinite  in  number.  This  will  be  apparent 
from  the  statement  that  these  data  include  more  or  less 
complete  descriptions  of  practically  all  buildings  in  the 
central  portions  of  all  cities,  towns,  and  villages  of  any 
size  in  the  United  States. 

Companies  as  a  whole  are  estimated  to  expend  over  a 
million  of  dollars  per  annum  for  rating  purposes.  Single 
companies  expend  as  much  as  $20,000  per  annum  for 
maps  alone. 

The  prime  requisite  for  a  system  of  rates  is  that  it  shall 
so  far  as  possible  be  uniformly  equitable;  that  is,  it  must 
compel  each  class  of  risk  and  each  individual  of  the  class 
to  pay  its  proper  proportion  of  the  fire  tax.  To  approxi- 
mate such  a  result,  however,  not  only  are  the  data  before 
mentioned  necessary,  but  the  amount  of  insurance  to  be 
carried  on  each  risk  must  be  known.  At  least  nine-tenths 
—  Mr.  Dean  says  nineteen-twentieths  —  of  all  losses  are 
partial.  The  great  majority  are  small  as  compared  with 
the  value  of  property  insured.  It  is  evident  that,  in  case 
of  a  partial  loss  destroying  less  than  one-half  the  value  of 
an  insured  property,  a  man  who  carries  insurance  to,  say, 
50  per  cent,  of  the  value  of  his  property,  secures  the  same 
amount  of  indemnity  as  the  man  who  carries  insurance 
amounting  to  80  per  cent.,  though  the  latter  has  paid  a 
much  heavier  tax.  It  follows  that  where,  as  is  usually 
the  case,  there  is  a  fire  department  and  water  works,  the 
man  who  carries  insurance  amounting  to  80  per  cent,  of 
the  value  of  his  property  is  entitled  to  a  lower  rate  than 
the  one  who  carries  insurance  amounting  to  but  50  per 
cent,  of  that  value.  For  this  reason  all  properly  devised 
schedules  or  tariffs  for  making  rates  are  based  upon  the 
use  of  a  co-insurance  clause,  usually  the  80  per  cent,  co- 
insurance clause,  which  compels  insurance  equal  to  80 
per  cent,  of  the  value  to  be  carried,  and  penalties  in  the 
shape  of  higher  rates  are  imposed  where  a  lower  percentage 
of  insurance  is  carried.  No  other  means  has  ever  been 
devised,  or  is  likely  to  be  devised,  which  so  fairly  and  auto- 


RATES  AND  HAZARDS  99 

matically  apportions  the  insurance  tax  according  to  the 
value  of  property,  just  as  ordinary  taxes  on  real  estate 
and  personal  property  are  supposed  to  be  apportioned. 
One  way  of  stating  the  principle  involved  is  to  say  that  the 
expectation  of  salvage  is  one  of  the  factors  involved  in 
making  rates. 

The  schedule  system,  as  its  name  implies,  makes  rates 
by  applying  to  classes  of  risks  and  to  individual  risks 
certain  predetermined  charges  and  credits  based  upon  the 
various  factors  of  construction,  occupancy,  exposure,  and 
protection  against  fire.  In  practice,  in  the  several  states 
or  districts  of  the  country,  many  different  schedules  for 
all  classes  of  risks  are  used,  though  more  than  one  attempt 
has  been  made  to  evolve  a  system  of  rating  which  might  be 
everywhere  applicable.  We  shall  not  be  able  even  to 
mention  many  of  these  numerous  systems,  nor  is  it  neces- 
sary, since  for  the  most  part  they  differ  in  detail  rather 
than  in  principle. 

In  the  case  of  such  simple  classes  as  dwellings,  schools, 
and  churches,  where  the  hazards  are  practically  the  same 
for  each  individual,  the  class  rate  is  applied  to  every  risk, 
differences  being  made  only  as  between  brick  and  frame 
and  those  under  or  beyond  the  protection  of  an  efficient 
fire  department. 

The  schedules  used  in  rating  the  different  manufactur- 
ing classes,  such  as  wood-workers,  packing  houses,  flour 
mills,  etc.  (usually  called  special  hazards),  are  made  up 
substantially  according  to  the  following  general  plan: 

Fird.  The  standard  or  ideal  building  of  the  class  in 
question  is  described.  This  building  is  standard,  not  only 
in  arrangement  and  construction,  but  often  as  to  its 
equipment  for  extinguishing  fire.  A  basis  rate  is  then 
assumed  for  a  risk  equaling  the  standard.  This  basis 
rate,  while  arbitrarily  fixed,  is  nevertheless  the  exjjrcssion 
of  the  judgment  of  expert  raters  as  to  irreducible  founda- 
tion of  hazard  incapable  of  analysis  and  made  up  of  the 
numerous  intangible   and   incalculable   things    (including 


100  YALE  READINGS   IN   INSURANCE 

moral  hazard  and  an  allowance  for  unknown  causes), 
which  is  thought  to  be  inseparable  from  any  risk  of  the 
particular  class  under  consideration,  no  matter  how  per- 
fect its  structure  and  arrangement  may  be. 

The  basis  rate  having  been  determined,  the  various 
defects  in  construction,  dangerous  or  improper  factors  of 
arrangement,  and  deficiencies  in  the  nature  and  extent  of 
the  apparatus  for  fire  protection  are  listed  with  a  table 
of,  usually  fixed,  charges  for  each;  usually,  too,  there  are 
some  credits  mentioned  for  extraordinary  features  of 
equipment  or  construction  too  infrequent  to  be  conven- 
iently included  in  the  description  of  the  standard.  Pro- 
vision is  also  made  in  such  a  schedule  for  a  further  credit 
or  charge  for  the  presence  or  absence  of  the  80  per  cent, 
co-insurance  clause,  or  some  other  percentage  co-insur- 
ance clause,  in  the  contracts.  Wlien  a  flom*  mill,  for 
example,  is  to  be  rated,  the  assumed  basis  rate  for  flour 
mills  is  used  as  a  starting  point,  and  to  it  are  added  the 
various  deficiency  charges  which  may  be  found  on  in- 
spection to  pertain  to  the  particular  mill  to  be  rated. 
From  the  rate  thus  obtained  a  deduction  is  made  for  any 
credits  to  which  the  mill  is  entitled.  Wlien  the  rate  thus 
made  up  is  ascertained,  the  price  to  be  charged  is  fixed 
by  the  allowance  or  charge  for  the  use  of  the  co-insurance 
clause  above  referred  to. 

Many  of  these  schedules  are  so  minute  and  intricate 
as  to  require  the  services  of  an  expert  rater  for  their  appli- 
cation, and  therefore,  and  also  for  the  sake  of  economy  and 
uniformity,  these  schedules  are  applied  to  special  hazards 
by  men  skilled  in  their  use  acting  for  associations  of  com- 
panies in  the  various  districts.  The  factor  of  exposure 
(sometimes  of  great  importance)  may  be  covered  by  more 
or  less  elaborate  charges;  or  more  frequently  in  the  case 
of  special  hazards,  together  with  other  additional  objec- 
tionable features,  is  left  to  the  judgment  of  the  rater. 
This  is  because  special  hazards,  as  a  rule,  are  more  danger- 
ous   to    their    surroundings    than    endangered    by    them. 


RATES  AND  HAZARDS  101 

Moreover,  they  are  usually  more  or  less  isolated  as  to 
location,  hence  their  chief  hazards  are  internal,  \\niile, 
on  account  of  the  numerous  and  often  hazardous  processes 
involved  and  because  inflammable  material  is  frequently 
handled,  these  risks  might  be  supposed  to  present  unusual 
difficulties  to  the  rater,  they  are  on  the  contrary  easier  to 
rate  with  a  reasonable  degree  of  satisfaction,  both  to  the 
companies  and  the  owners,  than  the  apparently  more 
simple  mercantile  risks,  which  so  far  exceed  them  in  number 
and  value.  The  different  processes  and  dangerous  ma- 
terials are,  in  the  case  of  special  hazards,  conspicuous, 
and  their  hazards  comparatively  obvious,  hence  their 
appraisal  or  estimate  may  be  the  more  easily  made.  In 
these  schedules  many  of  the  more  serious  defects  are  often 
penalized  by  very  severe  charges  in  order  to  compel  prop- 
erty owners  to  remedy  them;  indeed,  one  of  the  chief 
merits  of  the  schedule  system  of  rating  as  a  whole  is  that 
it  encourages  safe  methods  of  construction,  arrangement 
and  protection,  and  recognizes  them  in  the  rates. 

Another  and  the  chief  argument  usually  advanced  in 
favor  of  schedule  rating  is  that,  since  it  lists  the  various 
defects  of  each  risk  and  the  charges  made  for  the  same, 
property  owners  may  know  why  the  price  which  they  are 
compelled  to  pay  for  insurance  differs  from  that  which 
may  be  paid  by  their  neighbors,  and  hence  may  realize 
that  they  are  not  suffering  from  the  effects  of  arbitrary 
discrimination  or  of  personal  judgment  of  the  rater,  since 
it  is  evident  that  the  rate  on  their  own  property  is  governed 
entirely  by  its  own  faults  or  merits. 

In  some  states  or  disti-icts  as  many  as  thirty  different 
schedules  for  different  classes  of  risks  are  in  use. 

The  rating  of  mercantile  property,  which  comprises  by 
far  the  most  important  class,  both  as  to  the  number  of 
risks  and  value,  with  which  insurance  companies  have  to 
deal,  is  the  most  difficult  technical  task  which  confronts 
the  underwriter. 

There  are  many  schedules  in  use  for  this  purpose  in 


102  YALE  READINGS  IN  INSURANCE 

various  parts  of  the  country,  most  of  which,  however,  have 
many  points  of  resemblance.  The  following  may  be 
taken  as  a  description  of  the  average  schedule  of  this  kind 
used  in  towns  and  cities  of  moderate  size  —  those  used  in 
the  largest  cities  are  more  elaborate. 

In  most  states  and  districts  the  cities,  towns  and  villages 
are  divided  into  classes  —  commonly  from  four  to  six  in 
number  —  according  to  the  amount  of  protection  afforded 
by  the  water  works  and  fire  department  of  each.  Two 
basis  rates  —  one  each  for  brick  and  frame  mercantile 
buildings  —  are  then  adopted  for  each  class  of  towns. 
The  basis  rate  is  usually  in  the  case  of  brick  buildings 
predicated  upon  an  assumed  type  of  building  adopted  for 
that  purpose  and  described  in  detail  in  the  schedule.  In 
order  to  determine  the  rate  on  any  one  building  or  its 
contents  the  proper  basis  rate  is  taken  as  a  foundation, 
and  to  it  are  added  the  fixed  additional  charges  made 
necessary  by  its  structural  defects,  which  are  usually 
listed  with  more  or  less  minuteness  in  the  schedule,  a 
stated  charge  being  made  for  each  defect.  To  the  rate 
of  the  building  thus  determined  additions  are  made  for 
the  exposure  hazards  from  adjacent  risks  according  to 
the  table  or  rule  provided  in  the  schedule.  From  the 
figm-e  thus  obtained  a  deduction  is  made  on  account  of 
credits  allowed  for  those  features  of  construction,  or  of 
individual  fire  protection,  which  may  he  permitted  by  the 
schedule.  The  resultant  rate  is  called  the  unoccupied 
building  rate.  It  is  then  further  increased  by  a  charge 
made  on  account  of  the  nature  of  the  occupancy,  such,  for 
instance,  as  a  drug  store  or  a  dry  goods  store,  and  thus 
becomes  the  final  building  rate. 

The  rate  on  the  contents  is  then  made,  frequently  by  an 
addition  to  the  building  rate,  named  in  the  schedule  itself 
as  applying  to  the  particular  kind  of  contents  under 
consideration;  but  more  often  all  kinds  of  contents  are 
classified  roughly  into  from  two  to  four  or  five  classes, 
and  an  additional  charge,  over  and  above  the  building 


RATES  AND  HAZARDS  103 

rate,  to  be  applied  to  the  contents,  is  provided  for  each 
class,  and  is  used  in  every  case  where  contents  which  may 
be  embraced  in  that  class  are  found. 

The  foregoing  applies  to  the  rating  of  brick  mercantile 
buildings  and  their  contents.  Rates  on  frame  mercantile 
buildings  are  usually  made  by  a  more  simple  process. 

In  the  first  place,  all  frame  mercantile  buildings  are 
esteemed  to  be  substantially  alike  for  the  purpose  of 
insurance,  the  differences  in  point  of  construction  which 
are  recognized  being  confined  to  metal  roofs  and  brick  or 
iron  coverings  for  side  walls.  A  basis  rate  is  agreed  upon 
for  frame  buildings  in  each  of  the  various  classes  of  towns 
into  wliich  a  district  may  be  divided,  and  charges  are 
made  for  occupancy  and  exposures.  These  charges,  so 
far  as  occupancy  is  concerned,  are  usually  very  few  in 
number.  Wliere  frame  buildings  are  concerned  the  rate 
on  contents  is  seldom,  if  ever,  higher  than  the  rate  on  the 
building  itself,  and  very  often  less  than  the  building  rate, 
tecause  a  high  rate  on  such  a  building  is  usually  due  to 
a  heavy  exposure  hazard,  which,  so  far  as  the  contents 
are  concerned,  may  be  overcome  by  then*  hasty  removal 
when  the  danger  of  fire  is  imminent. 

The  treatment  of  exposures  in  these  numerous  schedules 
shows  great  variety  of  practice,  especially  as  regards  brick 
buildings.  In  fact,  for  the  most  part  this  important 
feature  in  the  rating  of  mercantile  buildings  and  contents 
has  had  very  inadequate  treatment.  When  brick  build- 
ings are  exposed  by  other  risks,  one  method,  very  fre- 
quently used,  is  to  make  a  fixed  charge  for  unprotected 
openings  in  side  walls  without  regard  to  the  character  of 
the  exposure.  Another  is  to  add  to  the  rate  of  the  exposed 
risk,  where  there  are  unprotected  openings,  some  percent- 
age of  the  rate  of  the  exposing  risk,  according  to  its  dis- 
tance from  the  risk  to  be  rated. 

Many  tariffs,  however,  leave  the  question  of  exposure 
charges  to  the  judgment  of  the  rater,  for  it  is  difficult, 
especially  in  the  case  of  brick  buildings,  to  provide  a  satis- 


104  YALE   READINGS   IN   INSURANCE 

factory  and  workable  rule  for  such  charges  in  a  schedule 
designed  to  be  comparatively  simple.  For  frame  build- 
ings there  are  usually  definite  rules  in  the  shape  of  a  heavy 
fixed  additional  charge  over  and  above  the  basis  rate  for 
each  frame  building  within  a  given  distance  —  usually 
20  feet  —  of  tlie  building  to  be  rated.  Thus,  if  a  frame 
building  unexposed  carries  a  basis  rate  of  1^  per  cent., 
tVo  of  1  per  cent,  will  be  added  for  every  frame  building 
exposing  it  within  20  feet,  and  also  for  every  frame  build- 
ing which  goes  to  make  up  a  continuous  row  of  wooden 
buildings  up  to  some  arbritary  limit,  such  as  8  per  cent., 
whicli  is  assumed  to  cover  the  most  dangerous  hazard 
which  can  be  created  by  a  combination  of  frame  mercantile 
buildings.  It  will,  of  course,  be  understood  that  the  basis 
rates,  as  well  as  the  increments  of  charge  made  for  ex- 
posures, vary  in  the  schedules  used  in  different  parts  of 
the  country. 

As  hinted  before,  two  attempts  liave  been  made  to 
evolve  systems  or  schedules  for  rating  mercantile  property 
which  might  be  universally  used.  The  first  of  these 
schedules  w^as  prepared  by  a  committee  of  eminent  under- 
writers under  the  chairmanship  of  Mr.  F.  C.  Moore,  then 
president  of  one  of  the  largest  American  insurance  com- 
panies, and  is  called  the  "Universal  Mercantile  Schedule." 
It,  or  some  modification  of  it,  is  used  in  many  of  the  large 
cities  of  the  country  to-day,  including  New  York,  Cleve- 
land, Denver  and  many  others,  and  it  is,  so  far  as  results 
yet  obtained  are  concerned,  the  most  important  of  any 
of  the  tariffs  Vv^hich  liave  ever  been  issued.  It  is  also,  of 
all  rating  schedules,  the  one  which  has  been  most  carefully 
and  minutely  elaborated  and  adjusted  to  meet  the  almost 
infinitely  varied  combinations  of  the  factors  of  construc- 
tion, occupancy  and  protection  which  are  to  be  found  in 
the  mercantile  buildings  of  a  large  city. 

This  schedule  was  a  great  advance  beyond  anything 
before  known  in  the  history  of  scientific  rating  and  has 
exercised  a  very  important  and  growing  influence  upon 


RATES  AND  HAZARDS  105 

the  framers  of  other  schedules  subsequently  made,  many 
of  which  are  but  imperfect  adaptations  of  the  Universal 
Mercantile  Schedule.  It  is  an  extremely  complicated  and 
intricate  schedule  and  cannot,  therefore,  be  described  or 
discussed  in  detail  in  the  limits  of  this  paper.  A  few 
extracts  from  the  writings  of  Mr.  Moore  in  regard  to  it 
will  be  given,  which,  in  connection  with  what  has  already 
been  stated  in  regard  to  schedule  rating,  will  enable  some 
idea  of  its  purpose  and  scope  to  be  formed:  (It  is  sug- 
gested in  this  connection  that  the  student  consult  Mr. 
Moore's  book  "Fire  Insurance  and  How  to  Build.") 

"The  mere  fact  that  there  are  more  than  a  hundred 
features  of  construction  in  a  single  building  which  should 
enter  into  the  consideration  of  its  rate,  irrespective  of 
nearly  forty  features  of  its  city  or  environment,  nearly 
forty  more  different  features  of  fire  appliances,  to  say 
nothing  of  more  than  a  thousand  possible  hazards  of 
occupancy;  and  the  further  fact  that  no  individual  knowl- 
edge is  equal  to  the  task  of  putting  a  price  upon  so  many 
items,  nor  any  individual  memory  capable  of  remembering 
them,  proves,  without  further  demonstration,  the  necessity 
not  only  of  conference  to  secure  combined  knowledge  for 
fixing  prices,  but,  also  a  printed  record  or  schedule,  to 
prevent  omissions  or  mistakes." 

"In  1891  a  committee  of  four  underwi'iters  was  appointed 
to  prepare  a  schedule  for  rating  mercantile  risks  which 
should  be  universal  in  its  application  throughout  the 
country.  Early  in  their  deliberations  they  reached  the 
conclusion  that  such  a  schedule  should  be  formulated 
upon  the  following  lines,  and  that  it  should  recognize: 

^' First.  A  key-rate  —  as  to  which  various  cities  and 
towns  differ. 

"Second.  Charges  for  variations  from  standards  of  con- 
struction —  which  ought  to  be  the  same  everywhere. 

'^  Third.  Charges  for  hazards  of  occupancy  —  which 
ought  to  be  the  same  everywhere. 

'^Fourth.     Charges    for  insuring  contents  according  to 


106  YALE  READINGS  IN   INSURANCE 

their  susceptibility  to  damage  —  which  ought  to  be  the 
same  everywhere. 

"Fifth.  The  variation  of  these  charges,  according  to  the 
construction  of  the  building.  Clearly  the  same  amount 
should  not  be  added,  even  for  the  same  stock,  to  two 
different  buildings  where  one  is  an  exceptionally  good 
building  and  the  other  an  exceptionally  poor  one;  there 
should  be  more  difference  between  the  building  and  stock 
rate  in  the  one  case  than  in  the  other. 

"Sixth.  The  treatment  of  fire  extinguishing  facilities, 
proximity  to  hydrants,  etc.,  for  the  particular  risk  rated, 
according  to  circmnstances ;  it  being  clear  that  if  the  risk 
is  within  reach  of  hydrants,  steam  engines,  etc.,  and  on  an 
eight-inch  or  larger  water  main,  it  should  rate  differently 
from  another  of  like  kind,  even  in  the  same  town,  if  the 
other  risk  be  not  so  fortunately  located." 

"So  in  other  items  or  featm-es  of  the  schedule,  the  com- 
mittee found  it  necessary  to  go  into  every  detail  of  hazard, 
leaving  as  little  as  possible  to  the  judgment  of  a  rating 
expert,  so  as  not  only  to  save  his  time  and  thought  at 
every  stage  of  the  rating  process,  but  to  prevent,  also, 
those  inconsistencies  of  rating  in  risks  of  one  and  the 
same  hazard,  resulting  from  fluctuations  of  judgment, 
which  so  often  produce  dissatisfaction  on  the  part  of 
owners  and  result  in  appeals  for  legislative  interference 
with  rating  organizations." 

"First.  A  standard  city  was  conceived  and  described. 
It  involved  level  and  wide  streets,  gravity  water  works, 
adequate  pipe  service  and  other  features  fully  explained. 

"Second.  A  standard  building  was  described,  which 
may  be  regarded  as  a  model  of  ordinary  construction,  not 
fire-proof. 

"  Third.    A  key-rate. 

"The  basis  rate  or  starting  point  for  rating  a  standard 
building  in  a  standard  city  was  fixed  at  25  cents,  after 
careful  consideration  of  the  experience  tables  of  the  com- 
panies." 


RATES  AND  HAZARDS  107 

Since  buildings  of  this  class  are  to  be  found  rarely,  this 
was  of  course  pure  assumption. 

"From  this  starting  point  or  basis  rate  of  25  cents,  and 
to  obtain  the  key-rate  of  any  city,  or  that  figure  at  which 
a  standard  building  in  the  city  should  be  rated,  additions 
were  made  according  to  the  deficiencies  of  the  city  as  to 
water  works,  fire  department,  building  laws,  inaccessible 
or  narrow  streets,  etc.,  etc.  This  key-rate,  so  determined, 
is  thereafter  used  to  obtain  the  rate  of  any  building  in  the 
city  to  be  rated  by  adding  to  it  charges  for  its  deficiencies 
from  the  specification  of  a  standard  building." 

For  the  purpose  of  rating  contents  of  buildings  and  in 
order  to  make  occupancy  charges,  no  fewer  than  1287 
varieties  of  contents  are  listed,  each  with  its  appropriate 
fixed  charge  to  be  added  to  the  building  rate;  and  also  a 
different  charge  to  apply  to  the  contents  themselves,  over 
and  above  the  final  building  rate.  Moreover,  a  separate 
application  for  credits  for  fire  protection  is  provided  for 
the  contents  as  compared  with  the  building. 

"No  schedule  should  be  framed  upon  a  basis  which  does 
not  recognize  a  certain  named  percentage  of  insurance 
to  value." 

"The  universal  schedule,  however,  does  not  enforce  or 
require  any  particular  amount  of  insurance,  but  simply 
adjusts  itself  (by  reductions  from  ascertained  rate  accord- 
ing to  stipulated  account  of  co-insurance)  to  whatever 
amount  the  property  owner  elects  to  carry." 

The  chief  objection  to  this,  or  in  fact  to  any  system  of 
schedule  rating,  is  the  necessity  for  the  constant  use  of 
assumptions,  not  only  in  determining  the  basis  rates,  but 
in  making  the  charges,  for  each  defect  of  the  construction, 
or  for  occupancy,  which  go  to  make  up  the  final  rate. 

A  great  deal  of  time  and  a  vast  amount  of  comparative 
research  has  been  exjiended  in  the  endeavor  properly  to 
appraise  the  dangers  incident  to  all  the  various  features 
of  construction,  protection,  occupancy  and  exposure,  yet 
it  is  manifestly  impossible  from  any  obtainable  record  of 


108  YALE  READINGS  IN   INSURANCE 

experience  to  assert  that  a  retail  drug  store,  for  instance, 
will  make  proper  an  addition  of  exactly  10  cents  to  the 
building  or  an  addition  of  exactly  50  cents  to  the  rate  on 
contents  over  and  above  the  building  rate  in  all  cases. 

A  tariff  has  been  devised  by  Mr.  A.  F,  Dean,  of  Chicago, 
called  by  him  a  "Mercantile  Tariff  and  Exposure  Formula 
for  the  Measurement  of  Fire  Hazards,"  which  differs 
radically  in  many  respects  from  the  "Universal  Mercantile 
Schedule,"  and  which  has  come  into  very  general  use  in 
the  western  states.  This  tariff  is  intended  to  render  some 
of  the  defects  just  mentioned  less  important,  and  is, 
moreover,  founded  on  a  different  conception  of  the  prob- 
lem of  rating.  Instead  of  endeavoring  to  establish  a 
basis  rate  for  a  standard  risk  in  a  standard  city,  Mr.  Dean's 
tariff  di\ides  cities  into  six  classes,  beginning  with  villages 
which  have  no  protection  whatever  and  which  are  known 
as  towns  of  the  sixth  class.  This  is  a  very  suitable  basis 
for  such  a  classification  since  its  definition  is  simple,  its 
existence  real  and  unchanging;  while  on  the  contrary  our 
ideas  of  a  standard  city  are  likely  to  change  from  time  to 
time.  From  this  as  a  starting  point  towns  are  graded 
according  to  their  protection  up  to  the  first  class,  which 
includes  all  cities  having  protection  in  the  way  of  water 
works  and  fire  department  of  exceptional  completeness 
and  efficiency,  and  better  than  those  classified  under 
sections  2  to  6  inclusive.  Moreover,  for  the  purpose  of 
rating,  provision  is  made  for  the  adoption,  as  a  starting 
point,  of  a  one-story,  brick  building  of  ordinary  construc- 
tion located  in  a  town  of  the  sixth  class.  This  kind  of 
building  is  fully  described  in  the  tariff.  Such  buildings 
are  common  in  towns  of  that  class.  However,  this  tariff 
does  not  attempt  to  name  the  basis  rates.  They  are  sup- 
posed to  be  adopted  or  selected  in  each  state  or  district 
by  raters  who  have  had .  experience  therein.  This  does 
away  with  the  necessity  for  making  ideal  standards  and 
estimating  basis  rates  therefor.  Concerning  this  matter 
of  adopting  basis  rates,  Mr.  Dean  holds  that  the  experience 


RATES  AND  HAZARDS  109 

of  underwriters  enables  them  to  estimate  more  readily 
a  proper  rate  for  an  ordinary  building,  such  as  may  be 
found  in  great  numbers,  than  for  an  ideal  standard,  which 
represents  a  class  with  which  insurance  companies  have 
had  very  little  if  any  experience.  Nothing  more  simple 
could  be  thought  of  as  affording  a  starting  point  or  basis 
rate  than  the  one-story  building  selected  by  Mr.  Dean; 
nor  could  any  risk  be  found  for  which  experienced  under- 
writers could  more  readily  or  intelligently  name  a  proper 
rate. 

This  basis  rate  having  been  decided  upon,  additions  or 
deductions  are  made  for  good  or  bad  features  of  con- 
struction, occupancy,  protection  or  exposure,  but  since 
the  average  building  is  taken  as  a  starting  point  these 
charges  and  credits  will  be  fewer  in  number  than  where  a 
standard  building  is  taken  as  the  foundation,  and  charges 
made  for  the  numerous  deficiencies  which  every  ordinary 
building  has.  Moreover,  instead  of  making  these  charges 
and  credits  by  means  of  arbitrarily  fixed  amounts,  the 
additions  and  subtractions  are  made  by  the  percentage 
method.  For  example,  in  the  "Universal  Mercantile 
Schedule,"  ten  cents  is  added  to  the  rate  of  a  building 
having  a  retail  drug  store  therein,  whereas  in  Mr.  Dean's 
tariff  a  percentage  of  the  previously  ascertained  building 
rate  is  added  for  this  occupancy,  and  a  similar  method  is 
used  in  making  charges  and  credits  for  various  features 
of  construction.  The  system  employed  for  estimating 
the  proper  percentage  additions  to  the  rate  on  account  of 
occupancy  is  especially  ingenious  and  logical  —  two  addi- 
tions are  made  for  most  occupancies,  one  for  the  causative 
hazard  of  the  contents,  i.e.,  the  danger  which  their  pres- 
ence begets,  the  other  for  the  extent  to  which  the  contents 
are  likely  to  aid  the  spread  or  intensity  of  a  fire. 

Similarly,  the  percentage  plan  is  followed  for  establish- 
ing basis  rates  for  one-story  brick  buildings  in  towns  of 
the  other  classes;  that  is,  the  basis  rate  for  a  town  of  the 
third  or  fourth  class  would  be  ascertained  by  deducting 


110  YALE   READINGS   IN   INSURANCE 

a  certain  percentage  from  the  basis  rate  selected  for  a 
similar  risk  in  a  town  of  the  sixth  class. 

The  chief  object  in  adopting  the  percentage  system  for 
variations  in  the  factors  affecting  rates  is  that  it  preserves 
the  relativity  of  charges  and  credits  which  are  made  in 
rating.  It  is  manifest  that  where  a  basis  rate,  for  ex- 
ample, is  40  cents,  an  additional  charge  of  10  cents  for 
occupancy  on  account  of  a  drug  store  is  much  more  severe 
than  where  the  basis  rate  is,  say,  80  cents.  With  the 
charge  for  a  drug  store  occupancy  of  10  per  cent,  on  the 
basis  rate,  however,  this  inequality  would  be  obviated. 
Again,  the  charge  of  12  cents  for  open,  unprotected  eleva- 
tors in  a  building  of  moderate  area  and,  say,  three  stories 
in  height,  and  wliich,  in  consequence  of  these  features, 
enjoys  a  low  rate,  is  relatively  very  much  heavier  than  the 
same  charge  in  the  case  of  a  large  six  or  seven-story  build- 
ing of  great  area  which  bears  a  high  rate.  In  the  latter 
case  12  cents  would  probably  be  about  one-tenth  of  the 
total  building  rate,  while  in  the  smaller  building  it  would 
be  at  least  20  per  cent.  Moreover,  an  open  elevator  in  a 
building  of  unusual  height  or  area  is  a  much  more  serious 
defect,  and  is  likely  to  be  responsible  for  much  greater 
destruction  of  property  than  a  similar  elevator  located  in  a 
small  building  of  moderate  height.  The  same  reasoning 
might  be  applied  to  the  credits  or  deductions  made  for 
favorable  featmes.  In  support  of  his  views  on  this  sub- 
ject Mr.  Dean  says: 

''If,  under  the  law  of  averages,  a  thousand  buildings  of 
given  construction,  occupancy  and  protection  will  show 
a  given  ratio  of  loss  to  value  during  a  given  period,  under 
the  same  law  a  thousand  flues,  hatchways,  skylights, 
well-holes,  wooden  ceilings,  or  other  parts  of  the  building, 
of  given  construction,  will  each  contribute  its  unvarying 
quota  of  this  ratio,  hence  the  several  parts  stand  in  a 
position  of  unchanging  relativity,  not  only  to  the  whole 
but  each  to  the  others.  Fire  hazard  is,  by  nature,  a  net- 
work of  relativity.     In  constructing  a  basis  schedule  we 


RATES  AND  HAZARDS  111 

necessarily  select  certain  features  of  hazard  as  separable 
and  attach  to  each  of  these  a  charge,  while  to  the  residue 
consisting  of  unanalyzable  parts  we  attach  a  lump  charge 
and  call  it  a  basis  rate.  There  is  no  intrinsic  difference 
between  the  charge  we  call  a  basis  rate  and  the  other 
charges  excepting  that  it  includes  all  things  too  obscure, 
indefinite  or  unimportant  to  schedule.  If  under  the  law 
of  averages  the  relativity  between  the  whole  and  its  parts 
does  not  change,  and  the  relativity  among  the  several 
parts  themselves  is  constant,  it  follows  that  each  charge 
bears  an  unvarying  relation  to  the  basis  rate,  or,  con- 
versely, the  basis  rate  a  constant  relation  to  the  other 
charges.  This  being  the  case,  it  is  false  logic  to  treat  the 
basis  rate  or  any  of  the  charges  as  a  dissociated  element 
of  hazard,  for  every  change  in  basis  rate  or  charge  involves 
a  disturbance  of  their  mutual  relativity.  The  real  question 
in  establishing  every  charge  is,  what  ratio  of  the  total  loss 
will  this  feature  of  hazard  under  the  law  of  average  prob- 
ably contribute?  When  this  ratio  has  been  established 
by  judgment  and  experience,  it  should  take  its  place  in 
every  schedule  as  a  fixed  ratio  bearing  a  constant  relation 
to  the  whole  and  its  several  parts." 

Under  this  tariff  the  rates  on  the  contents  of  brick 
buildings  are  established  through  a  differential  added  to 
the  occupied  building  rate.  This  differential  is  based  upon 
the  damageability  of  the  contents  by  water,  smoke,  heat, 
breakage,  etc.,  as  the  result  of  fire,  and  represents  the  rela- 
tive value  of  fire  department  protection  to  contents  as 
compared  with  its  value  to  the  building  itself.  The  tariff 
contains  a  table  of  differentials  referring  to  about  four 
hundred  different  kinds  of  contents,  and  further  graded 
to  correspond  with  ten  different  sets  of  basis  rates,  each 
set  including  a  basis  rate  for  a  town  of  every  class.  These 
differentials  are  also  arrived  at  by  the  percentage  method, 
by  averaging  the  differentials  contained  in  many  previous 
tariffs  made  for  unprotected  towns,  and  then  subjecting 
these   differentials   to   an   ingenious   scale   of   percentage 


112  YALE  READINGS  IN  INSURANCE 

comparisons  with  the  building  as  affected  by  the  various 
grades  of  fire  protection,  according  to  the  theory  that 
the  greater  the  damageabiUty  of  the  contents  the  less 
valuable  to  them  —  as  compared  with  the  building  —  is 
the  protection  against  fire  afforded  by  water  works  and 
fire  departments. 

A  separate  schedule  based  upon  similar  principles  is 
devised  for  frame  buildings,  by  which  rates  for  frame 
buildings  and  their  contents  in  a  city  or  town  of  any  class 
may  be  readily  ascertained  when  once  a  basis  rate  has  been 
adopted  for  an  ordinary  shingle-roof,  frame  building  in  a 
sixth  class  town.  One  important  difference  between  the 
brick  and  frame  schedules  to  be  noticed  is,  that  the  dif- 
ferential for  contents  in  the  case  of  exposed  frame  build- 
ings depends  upon  their  removability  instead  of  their 
damageabiUty,  and  a  table  of  contents  graded  according 
to  their  removability  is  provided. 

The  matter  of  exposure  charges  and  hazards  is  treated 
in  a  separate  department  of  the  tariff  called  the  exposure 
formulae.  These  formulae  enable  the  rater  to  make 
additions  to  the  rates  of  both  brick  and  frame  buildings 
and  their  contents  on  account  of  exposure  hazards  by 
means  of  a  highly  ingenious  exposm^e  table,  graduated 
with  reference  to  the  construction  of  buildings,  the  dis- 
tances between  risks  which  affect  each  other,  the  amount 
of  fire  department  protection,  and  the  hazards  of  the  ex- 
posing risks.  This  table  is  also  made  up  on  the  percentage 
system,  each  risk  radiating  a  percentage  of  its  own  rate 
or  absorbing  a  percentage  of  the  rate  of  the  adjoining 
risks.  The  theoretical  considerations  upon  which  this 
table  and  its  applications  are  based  are  given  below  in 
Mr.  Dean's  own  language: 

"External  exposures  are  classified  under  three  heads: 

"a.  Radiated  exposure,  consisting  of  the  proportion 
of  its  own  hazard  a  risk  radiates  toward  exposed  risks. 

"b.  Absorbed  exposure,  consisting  of  the  proportion 
of  radiated  hazard  absorbed  by  an  exposed  risk. 


RATES  AND   HAZARDS  113 

"c.  Transmitted  exposure,  or  the  proportion  of  the 
hazard  a  risk  absorbs  from  one  side,  that  is  transmitted 
by  it  to  a  risk  on  the  other  side. 

"Under  the  above  classification,  it  is  proper  to  bear  in 
mind: 

"First.  That  every  exposing  risk  radiates  some  ratio 
of  its  own  hazard  towards  exposed  risks. 

"Second.  That  every  exposed  risk  absorbs  some  ratio 
of  this  radiated  exposure. 

"Third.  That  every  risk  transmits  some  ratio  of  the 
hazard  it  absorbs. 

"Fourth.  That  radiated,  absorbed,  and  transmitted 
exposure  are  all  modified  by  structure,  clear  space  and 
fire  department  protection. 

"In  view  of  the  numerous  ratios  and  ratios  of  ratios 
found  in  the  problem  of  measuring  exposures,  the  necessity 
for  some  fixed  standard  of  comparison  is  clear,  because 
a  standard  is  the  fu-st  essential  in  all  measurement  —  it  is 
equally  clear  that  as  ratios  are  to  be  measured  the  standard 
must  be  a  ratio  and  not  a  quantity.  Again,  if  we  view 
exposure  from  the  standpoint  of  cause  and  effect,  it  is 
evident  that  radiated  exposure  is  to  be  taken  as  cause; 
hence  it  is  necessary  to  select  some  ratio  of  the  hazard  of 
the  exposing  risk  as  a  standard. 

"In  selecting  any  standard  of  measurement,  it  is  proper 
to  choose  that  which  is  most  generally  available  and  most 
free  from  change.  These  qualities  are  found  in  the  great- 
est degree,  perhaps,  in  the  exposure  of  frame  buildings  by 
frame  buildings.  In  existing  tariffs,  there  is  substantial 
agreement  in  gi-anting  that  a  frame  building  transmits 
all  the  exposure  radiated  towards  it  by  other  contiguous 
frames,  and  while  there  is  a  considerable  diversity  in  the 
ratio  of  radiated  exposure  in  the  several  tariffs,  they  ap- 
proach nearer  to  uniformity  in  this  ratio  than  in  any  other 
feature  of  exposure.  An  examination  of  different  state 
tariffs  shows  a  range  of  exposure  charge  in  unprotected 
frame  rows  from  about  one-thiixl  to  one-half  the  hazards 


114  YALE  READINGS  IN  INSURANCE 

of  the  exposing  risk.  The  average  of  all  tariffs  approxi- 
mates closely  to  40  per  cent.,  while  under  the  different 
grades  of  protection  this  ratio  decreases  in  proportion 
to  the  protection. 

"It  can  hardly  be  disputed  that,  under  like  protection, 
like  buildings  radiate  like  ratios  of  their  own  hazard,  and 
if  this  be  true  the  standard  of  radiated  exposure  under 
any  given  grade  of  municipal  protection  should  be  the  same 
everywhere;  hence  all  tariffs  should  agree  in  the  adoption 
of  a  common  standard." 

Wliatever  may  be  thought  of  the  brick  and  frame  sched- 
ules, and  though  founded  upon  scientific  principles  and 
worked  up  according  to  scientific  methods  they  will,  un- 
doubtedly, be  criticised  as  to  details,  it  is  the  writer's 
belief  that  the  exposure  formulae,  at  least,  will  come  to 
be  recognized  as  exliibiting  the  most  satisfactory,  logical 
and  adequate  treatment  known  up  to  this  time,  of  this 
highly  complex  and  hitherto  maltreated  department  of 
the  science  or  business  of  making  rates  for  mercantile 
risks.  A  detailed  explanation  of  them  is  impossible 
within  the  limits  of  this  paper,  which,  indeed,  must  be 
considered  as  an  introduction  to  the  study  of  rating  sys- 
tems rather  than  an  exposition  of  their  methods  and  prac- 
tice. Moreover,  some  little  study  is  required  in  order 
to  understand  the  use,  or  to  appreciate  the  great  value 
of  these  exposure  formulae.  Nor  would  it  be  possible 
for  any  one  without  large  experience  to  realize  the  difficul- 
ties which  must  be  overcome  in  any  successful  attempt  to 
construct  a  logical  and  workable  scheme  for  the  proper 
measurement  and  distribution  of  exposure  hazards.  Mr. 
Dean's  tariff  formulae  as  now  published  are  intended  for 
use  in  towns  and  cities  of  ordinary  size  and  would  require 
additional  elaboration  for  use  in  the  largest  cities.  There 
is  no  reason  why  tariffs  or  schedules  based  upon  the  same 
principles  should  not  be  made  for  all  kinds  or  classes  of 
risks,  manufacturing  as  well  as  mercantile. 


CHAPTER  VI 

FIRE-RATING  * 

Fire-rating,  as  a  science,  must  consist  of  an  accurately 
verified  body  of  Ivnowledge,  and  an  activity  based  upon 
this  body  of  organized  knowledge,  which  has  for  its  end 
the  measurement  of  fire  hazard  in  conformity  with  the 
principles  established  by  the  science  itself. 

"A  science  teaches  us  to  know,  an  art  to  do.  Science 
gives  us  principles,  while  an  art  gives  us  rules.  In  art, 
truth  is  a  means  to  an  end.  In  science,  it  is  an  end  itself. 
Historically,  art  has  often  preceded  science."  ^ 

The  activity  of  measuring  fire  hazard  based  upon  this 
organized  body  of  knowledge  might  be  called  an  art,  and 
the  real  c{uestion  is,  whether  this  activity  can  be  intelli- 
gently guided  by  a  basic  science  consisting  of  an  organized 
body  of  knowledge  of  the  phenomena  of  fire  destruction. 

There  is  an  interesting  contrast  and  resemblance  be- 
tween the  evolution  of  fire-rating  and  the  evolution  of 
gunnery.  Gunnei-y  has  for  its  end  the  concentration  of 
destruction,  while  fire-rating  has  for  its  end  the  dispersion 
of  destruction.  Gunnery  seeks  to  send  destruction  with 
the  greatest  possible  certainty  to  a  given  spot.  Fire-rat- 
ing seeks  to  apply  relief  for  destruction  by  fire  with  the 
greatest  possible  accuracy  through  the  equitable  distri- 
bution of  assessed  loss  over  areas  of  time  and  space.     Gun- 

'  By  A.  F.  Dean,  Assistant  Manager,  Western  Department,  Spring- 
field Fire  and  Marine  Insurance  Company.  Roprintpd  from  pages 
47-60,  73-80,  of  "Fire  Rating  as  a  Science;"  J.  M.  Murphy.  Chicago, 
1901. 

^  Sphere  of  Science,  Hoffman. 

115 


116  YALE  READINGS  IN   INSURANCE 

nery  started  from  the  established  fact  that  gunpowder 
is  explosive;  fire-rating,  from  the  fact  that  fire  is  destruc- 
tive. From  its  established  fact,  gunnery  provisionally 
assumed  that  gunpowder,  exploded  in  a  tube  open  at  one 
end,  would  eject  a  missile;  next,  that  by  pointing  the  tube 
in  a  given  direction  it  would  send  the  missile  in  that  direc- 
tion; next,  that  the  projectile  would  go  farther  with  a 
larger  charge  of  powder  and  the  elevation  of  the  open  end 
of  the  tube ;  next,  that  it  would  go  farther  if  round  than  if 
of  irregular  shape,  and  still  farther  if  conical  rather  than 
splierical. 

All  these  assumptions  were  qualitative,  and  the  further 
progress  of  gunnery  as  a  science  demanded  quantitative 
prevision,  in  order  to  send  the  projectile  as  nearly  as  pos- 
sible to  any  given  spot  within  the  widest  range.  It  was 
found  that  by  rifling  the  gun  to  impart  a  circular  motion 
to  the  projectile  it  would  go  straighter,  but  this  circular 
motion  was  found  to  develop  a  lateral  tendency,  known 
as  windage.  The  possibility  of  quantitative  reasoning 
started  with  the  invention  of  graded  sights  to  measure 
the  exact  degree  of  elevation  and  deviation  in  the  gun 
necessary  to  correct  windage  and  gravitation.  Through 
the  investigation  of  explosives  and  initial  velocity,  the 
gradual  evolution  of  a  variety  of  collateral  apparatus 
followed,  until  it  has  become  possible  to  send  a  projectile 
to  any  desired  point  within  a  radius  of  fifteen  or  twenty 
miles  with  marvelous  accuracy;  and  out  of  the  original 
fact  that  gunpowder  is  explosive  many  sciences,  or  more 
properly  arts,  have  been  evolved.  Among  these  we  find 
the  construction  of  guns,  projectiles,  range-finders,  sight- 
ing apparatus,  explosives,  fortifications,  and  armored 
protection.  In  addition  to  these  allied  activities,  applied 
mathematics  has  been  pressed  into  service  in  the  investi- 
gation of  force  and  resistance,  and  in  determining  the  rela- 
tions between  initial  velocity  and  the  parabola  of  two 
directions,  caused  by  windage,  gravitation,  etc. 

During  the  slow  evolution  of  gunnery  and  its  collateral 


FIRE-RATING  117 

sciences,  it  was  assumed  that  a  hollow  projectile,  filled 
with  explosive  material,  could  be  made  to  explode  either 
within  a  given  time  or  in  contact  with  its  target,  and  that 
the  explosion  of  the  projectile  would  create  greater  de- 
struction than  a  solid  projectile. 

Quantitative  prevision  paused,  however,  with  this 
secondary  explosion  of  the  shell,  and  it  remains  for  the 
future  to  determine  the  possibility  of  ascertaining  how 
many  sub-projectiles  will  be  created  by  this  explosion, 
and  in  what  direction  and  how  far  each  fragment  will  go. 

So,  in  the  problem  of  fire-rating,  starting  from  the 
known  fact  that  fire  is  destructive,  we  seek  to  disperse  the 
disaster  through  assessments  on  specific  property,  in  pro- 
portion to  its  specific  liability  to  destruction,  under  the 
general  law  of  average. 

-'By  keeping  a  record  for  a  year  we  can  determine  at  the 
end  of  the  year  the  ratio  between  receipts  and  disburse- 
ments necessary  to  make  good  the  destruction,  and  through 
a  comparison  of  the  total  amount  insured  with  the  total 
premiums  received  we  are  able  to  determine  the  average 
rate  for  a  given  period  on  all  property.  By  similar  com- 
parisons we  are  able  to  determine  the  ratios  of  loss  and 
expense.  Experience  has  further  shown  that  certain 
species  of  property  have  so  many  points  of  resemblance 
that  they  can  be  grouped  in  classes,  and  that  the  record 
of  any  of  these  classes,  for  any  given  period,  will  show 
similar  ratios  for  each  class.  So  far  we  are  able  to  estab- 
lish exact  measurement,  from  which  we  are  enabled  to 
determine  intelligently  our  selling  price  for  indemnity  as 
a  whole,  or  for  any  class  of  which  we  have  kept  a  separate 
record.  With  equal  precision  we  can,  by  classifying  the 
different  grades  of  fire  department  protection,  or  con- 
struction of  buildings,  determine  the  average  for  each 
standard  of  protection  for  each  character  of  building; 
or  by  keeping  a  record  of  any  or  all  of  these  features  we 
can  determine  the  averages  for  one  or  all  in  any  given 
state. 


118  YALE  READINGS  IN  INSURANCE 

So  far  oiir  reasoning  has  potentially  the  accuracy  of 
mathematics.  We  now  reach  a  secondary  degree  of 
accuracy  in  the  specific  features  of  each  risk,  as  found  in 
its  methods  of  lighting,  heating,  occupancy,  structural 
features,  private  devices  for  preventing  fires,  and  its 
exposures  from  other  buildings.  It  is  clearly  within  the 
possibilities  of  statistical  science  to  determine  the  relative 
degi'ees  of  hazard  between  lighting  a  building  by  candles, 
coal  oil,  gas,  or  electricity,  or  heating  it  by  open  fire- 
places, stoves,  hot  air,  or  steam  furnaces,  and  it  would 
be  equally  possible  to  determine  the  same  relations  with 
all  the  more  miportant  features  of  structure,  occupancy, 
and  exposure,  provided  it  were  possible  to  locate  in  every 
case  the  cause  of  the  fire,  but  it  would  require  a  vast  and 
expensive  system  of  statistics  based  upon  data  impossible 
to  obtain,  for  the  reason  that  the  origin  of  fires  is  very 
often  unknown.  This  diflficulty  has  been  met  by  utilizing 
a  system  of  analysis  of  the  individual  risk,  through  which 
we  estimate  by  charges  and  credits  the  relative  hazard 
of  its  parts,  as  far  as  analyzable.  In  adopting  this  plan 
of  avoiding  a  tremendous  expansion  of  statistics  for  a 
comparatively  unimportant  end,  fire  insurance  has  fol- 
lowed the  usages  of  the  industrial  world  and  all  govern- 
ments in  determining  value  relations  by  estimate;  hence, 
as  an  expedient,  it  is  identical  with  the  expedient  adopted 
from  time  immemorial  by  governments  and  peoples  for 
similar  conditions.  In  thus  adopting  the  economic  law 
of  common  sense  instead  of  searching  for  obscure  and 
innumerable  laws  of  causation  in  the  effort  to  obtain  more 
exact  relations  among  ununportant  factors,  reasonable 
equity  is  obtained  so  long  as  personal  favoritism  is  abol- 
ished, and  every  man  accorded  the  same  charge  or  credit 
for  the  same  item  of  hazard. 

— We  now  reach  a  third  phase  of  fire-rating,  in  the  name- 
less, numberless,  and  often  remote  causes  of  fire  which  are 
not  only  unanalyzable,  but  often  undiscoverable. 

In  this  stage,  analysis  and  prevision  are  as  uncertain 


FIRE-RATING  119 

as  in  the  post-explosion  stage  of  gunnery,  in  which  it  is 
impossible  to  foretell  the  specific  consequences  which 
will  result  from  the  bursting  of  a  shell.  In  this  remote 
region  which  lies  outside  the  borderland  of  inductive 
observation,  however,  fire  underwriting  experience  has 
brought  forth  from  the  crucible  of  conference  and  com- 
petition some  nuggets  of  pure  metal,  by  establishing 
fixed  usages  which  appeal  to  common  intelligence.  Mer- 
cantile occupancies  have  been  analyzed,  classed,  graded, 
and  valued;  the  permanent  features  of  industrial  processes 
sorted,  estimated,  and  labeled  with  their  relative  hazard 
value,  and  the  residuum  of  irreducible  slag  left  in  the 
crucible  has  been  estimated  as  a  whole  for  each  class  of 
property  under  the  name  of  "basis  rate."  This  basis 
rate,  arbitrarily  assumed  as  the  residuum  of  hazard,  after 
it  has  been  purged  of  all  measurable  factors,  is  the  nucleus 
on  which  each  rate  estimate  is  built,  and  when  so  built  we 
have  a  synthesis  of  artificial  relations  between  the  analyzed 
and  unanalyzed  factors  of  hazard  as  a  sort  of  working 
hypothesis.  By  a  singular  reversal  of  ordinary  reasoning 
methods,  these  artificial  relations,  established  by  reasoning 
purely  hypothetical,  constitute  the  basis  of  the  ratios  on 
which  fire  insurance  must  establish  its  sequential  relations. 
In  ordinary  reasoning,  the  individual  rate  should  come 
last  instead  of  first,  but  necessity  has  compelled  a  reverse 
process  of  reasoning  —  a  good  deal  like  it  would  be  in 
gunnery  if  we  should  begin  with  the  pieces  of  an  exploded 
shell,  and  calculate  the  trajectory  of  each  irregular  frag- 
ment back  to  the  place  it  occupied  in  the  shell  before 
explosion,  then  figure  the  gravity,  windage,  elevation, 
initial  velocity,  and  all  that  sort  of  thing  necessary  to 
replace  the  shell  intact  in  the  gun  whence  it  started. 
This  perplexing  reversal  is,  however,  a  logical  necessity 
imposed  ujoon  fire  insurance  by  its  relations  with  policy- 
holders, and  the  fact  does  not  necessarily  render  the  solu- 
tion of  its  problem  less  accurate  on  that  account.  It 
is  this  blindfolded  orientation  that  creates  most  of  the 


120  YALE  READINGS  IN  INSURANCE 

prevailing  skepticism  as  to  the  possibility  of  scientific 
rating.  This  confusing  necessity  of  backing  into  the  shafts 
before  we  start,  originates  from  the  following  sequence 
of  usage. 

The  ratios  of  loss  and  expense  are  found  by  comparing 
amounts  disbursed  with  aggregate  premiums;  but  this 
aggregate  is  composed  of  a  large  number  of  premiums 
from  individual  risks,  and  a  condition  precedent  to  the 
collection  of  these  premimns  is  that  there  must  be  a  rela- 
tion established  between  each  individual  hazard  and  its 
premiums,  satisfactory  to  the  buyer  of  indemnity.  This 
makes  the  first  act  that  sets  the  wheels  in  motion  an  esti- 
mate of  the  individual  premium;  for  it  is  the  aggi-egate 
of  these  individual  premiums  which  constitutes  the  standard 
that  enables  us  to  sight  back  and  determine  the  rela- 
tive accuracy  of  the  original  assumptions,  and  the  deter- 
mination of  this  relative  accuracy  enables  us  to  tell  not 
only  whether  these  assumptions  were  too  high  or  too  low, 
but  how  much  too  high  or  low  —  in  other  words,  to  estab- 
lish the  quantitative  reasoning  through  which  we  can 
accurately  estimate  hazard  in  dollars  and  cents.  In  this 
reciprocal  process,  established  rates  must  be  made  through 
an  endless  cycle  of  reasoning  in  which  it  is  as  immaterial 
which  comes  first  as  it  is  in  the  cycle  of  causation  between 
the  chicken  which  lays  the  egg  and  the  egg  which  hatches 
the  chicken.  The  essential  point  is  that  a  series  of  pro- 
visional assumptions  through  an  unending  process  of 
readjustment  tend  to  become  more  and  more  exact, 
provided  we  are  faithful  to  the  assumptions. 

In  its  present  status,  fire-rating  as  a  science  might  be 
compared  with  the  science  of  gunnery,  as  it  would  be  if 
reasoning  had  simi)ly  amused  itself  with  wagering  on  the 
probable  trajectories  of  the  fragments  of  exploding  shells. 
We  gather  up  the  disjecta  membra  of  provisionally  assumed 
charges  and  credits,  and  patch  them  onto  a  provisionally 
assumed  nucleus,  known  as  a  basis  rate,  and  tlien  call  this 
thing   of   provisionally   assumed   shreds   and   patches  an 


FIRE-RATING  121 

individual  rate.  When  a  local  tariff  of  these  assumptions 
has  been  formulated,  it  is  turned  out  to  the  mercy  of  the 
elements.  Contention  within  and  without  is  allowed  to 
work  its  own  sweet  will  in  changing  artificial  relations  of 
coexistence  into  relations  of  sequence,  and  the  structure 
of  artificial  relations  we  have  erected  with  so  much  travail 
begins  to  disintegrate  almost  before  the  paint  is  dry. 
This  local  tariff  of  individual  rate  estimates,  constructed 
with  more  or  less  regard  to  a  basis  tariff  of  hypothetical 
assumptions,  is,  up  to  date,  the  furthest  reach  of  fire- 
rating  as  an  activity.  It  would  be  a  work  of  supererogation 
to  point  out  the  lamentable  results  of  the  arrested  develop- 
ment which  has  checked  further  growth  at  the  primary 
stage  of  reasoning,  where  we  simply  recognize  coexistent 
relations  in  hazard,  which  we  arbitrarily  alter,  apparently 
without  the  slightest  conception  that  in  so  doing  we  are 
essaying  the  impossible  task  of  changing  space  into  time. 
Viewed  as  coexistent  relations  only,  there  is  no  lack  of 
inconsistency  in  our  rates,  but  by  constant  tinkering 
with  these  relations  in  the  attempt  to  make  them  sequential 
we  violate  a  fundamental  law  of  all  science.  We  construct 
a  basis  schedule  of  each  state,  but  cannot  show  that  it 
bears  any  logical  relation  to  the  schedules  of  other  states. 
We  say  that  each  individual  rate  is  the  sum  of  a  basis  rate 
combined  with  certain  charges  and  credits,  but  cannot 
show  whether  this  basis  rate  is  relatively  correct  when 
compared  with  others,  nor  can  we  show  that  the  charges 
and  credits  which  permeate  many  classes  are  consistently 
imposed  upon  each  class. 

This  naive  disregard  of  relations  crops  out  not  only 
in  the  comparison  of  every  existing  basis  tariff  with  other 
tariffs,  but  in  the  comparison  of  parts  of  the  same  tariff 
with  other  parts;  selecting  for  example  the  following: 

Illinois  State  Board  Minimum  Tariff 1894 

Minnesota  and  Dakota 1895 

Southeastern  Tariff  Association 1895 

Indiana  Mercantile  Schedule 1893 


122  YALE  READINGS  IN  INSURANCE 

Missouri,  Kansas  and  Nebraska  Minimum  Tariff. . . .  1886 

Missouri  Minimum  Tariff 1894 

Illinois  Mercantile  Schedule 1895 

Western  Mutual  Underwriters'  Association  Minimum 

Tariff    1882 

New  England  Insurance  Exchange  Schedule 1894 

Universal  Mercantile  Schedule 1896 

In  the  following  table  ^  the  upper  figures  show  the 
number  of  times  the  same  charge  appears  in  all  the  above 
tariffs,  and  the  lower  figures  show  the  different  charges 
made  for  the  same  thing: 

Awnings,  wood  on  one-story  building,  ^,  -^,  ^V- 

Boiler  in  frame  boiler-house,  H,  3%,  i§,   ff,  /^,  ^\,  ^, 

Shingle  roof  boiler-house,  j%,  ^5,  1°,  ^V- 

Shingle  roof  on  brick  boiler-house,  y%,  j^,  |f,  j'j,  /^. 

Cornice,  wood,  \,  |,  j%,  ^%. 

No  casks  or  pails  of  water,  |,  f^,  ^f,  ||,  ^f. 

Dipping  in  building,  H.  U.  jh- 

Heating  by  furnace,  i,  ^  x%,  xi  ^\,  ?V,  ^• 

Heating  by  wood  stoves,  1§,  ^%,  ^^,  ||,  i'^,  ^V.  sV- 

Heating  by  coal  or  oil  stoves,  |,  f|,  if,  2%,  ||,  ^V.  in- 

Lighting  by  other  than  by  gas  or  electricity,  |,  f  J,  ^j,  f|. 

Lighting  by  kerosene,  standard  metal  lamps,  |,  y\j,  ^j. 

Lighting  by  kerosene,  glass  lamps,  y\,  yi-,  ^V- 

Lighting  by  kerosene,  lamps  filled   by  daylight  only,  ^5, 

4  5  112 

T?»    25>     3ff>    157    -ffff- 

Ladders,  stationary  (none),  5,  xf,  ^^5,  ^fV,  ^?. 
Planer,  each  machine,  ^\,  i^,  ij-,  7^,  lU- 
Planer,  without  blowers  or  conveyors,  j^,  -^jj,  y^j,  y|^. 
Picker  in  mill,  yV,  ^V.  sV.  W>  il^-  xk- 
Roof,  shingle,  f,  H,  !i  H,  ih  ^\,  ^U 
Spittoons,  sawdust,  f,  ^,  ^5. 
Shavings  vault,  wood,  /j,  ^5,  t^(T>  tz5- 
Shavings  vault  (not  cut  off),  if,  y'5,  ^V.  ?V.  ?(j- 
Shavings  vault,  standard  (cut  off),  y^,  y^,  -jV- 
Sha^Tings  vault,  standard  (not  cut  off),  y^o,  yV,  A- 
Metal  stack  through  metal  roof,  f,  y;,  ^5)  -55 • 
Metal  stack  through  shingle  roof,  with  collar,  y^^,  ff , 

'  The  author  is  indebted  to  the  late  L.  H.  Ticknor,  Esq.,  of  Peoria, 
III.,  for  the  above  list. 


FIRE-RATING  123 

Metal  stack  through  roof  or  floor  (no  jacket),  ^V,  -^^,  ^^,  /j. 

Metal  stack  through  shingle  roof,  xV>  2*5.  If- 

Varnishing,  j%,  ^V.  I!,  is,  ts,  txts- 

Watchman  and  clock  (none),  f,  ^5,  y\,  |^,  |§,  5*5.  yV.  ii 

Watchman  (no  clock),  f,  fj,  -Jf,  xV>  41- 

Wood-work,  not  whitewashed  or  painted,  -^/,  fj,  j*^,  ^2^. 

One  might  go  on  indefinitely  pointing  out  incongruities 
of  this  kind  in  our  coexistent  relations,  and  it  needs 
no  argument  to  show  that  every  attempt  to  cobble  these 
into  relations  of  sequence  makes  confusion  worse  con- 
founded. 

It  would  be  a  truism  to  say  that  in  the  face  of  inconsist- 
encies so  glaring,  explanation  or  defense  is  impossible. 
The  public  contention  that  rates  are  made  "by  guess  and 
begad"  is  susceptible  of  proof  from  the  documentary 
evidence  contained  in  our  own  tariffs.  It  matters  not 
that  under  the  leveling  force  of  self-interest  among  brokers, 
agents,  companies,  and  the  public,  receipts  and  disburse- 
ments come  out  almost  exactly  even,  if  taken  for  decade 
periods;  in  other  words,  that  indemnity  as  a  whole  is 
practically  sold  at  average  cost.  Our  failure  to  make  a 
profit  does  not  concern  the  public,  but  our  failure  to 
maintain  reasonably  true  rate  relations  offends  the  sense 
of  relation  which  is  instinctively  the  basis  of  every  reason- 
ing process."  Even  low  rates  that  are  inequitable  are  an 
offense  to  common  intelligence. 

In  the  past,  expediency  alone  has  fixed  the  price  of 
fire  indemnity.  The  seller  has  fought  for  high  prices,  and 
the  buyer  for  low  prices,  and  l:)etween  these  two  contending 
infiuences,  rates  have  been  kept  in  an  irregular  and  spas- 
modic motion  similar  to  the  atmospheric  wave  known 
in  music  as  cacophony.  Fire  destruction,  too,  like  every 
other  motion  resulting  from  contending  influences,  has 
created  its  own  wave.  We  have  thus  two  irregular  waves 
—  the  loss  wave  occasioned  by  the  countless  eknnents  of 
fire  hazard,  and  a  sort  of  ''rough  and  tuml)le"  zigzag 
(which  might  be  dignifietl   by   the  name   of  vniv  wave) 


124  YALE  READINGS  IN  INSURANCE 

caused  by  the  football  tactics  of  buyers  and  sellers  of 
indemnity,  and  further  complicated  by  the  arbitrary 
decisions  of  an  umpire,  known  as  the  local  agent,  who  has  a 
stake  up  on  the  game. 

While  we  know  that  rates  must  be  constantly  changed, 
we  construct  oiu-  tariffs,  in  theory  at  least,  on  the  assump- 
tion that  we  can  maintain  them  permanently  at  an  un- 
varying level.  Wlien  contending  influences  force  this 
level  into  a  rate  wave,  it  is  invariably  a  cacophonous 
wave,  not  in  harmonious  relations  with  the  wave  of  fire 
destruction,  because  it  is  largely  the  product  of  contend- 
ing personal  motives  beyond  quantitative  analysis.  In 
making  rate  changes,  in  obedience  to  the  law  of  expediency, 
we  not  only  observe  no  system,  but  cannot  observe  sys- 
tem. At  one  time  we  make  a  so-called  percentage  change, 
at  another  a  flat  rate,  at  another  a  competitive  rate,  at 
another  a  suspended  rate,  and  after  a  series  of  these 
changes  has  completely  obliterated  established  relations 
we  are  again  compelled  to  construct  new  basis  tariffs,  and 
re-create  hundreds  or  thousands  of  local  tariffs  of  coex- 
istent relations,  which,  before  we  can  place  them  in  the 
hands  of  our  agents,  are  fly-blown  with  the  germs  of 
dissolution,  because  they  furnish  our  only  available  ma- 
terial for  establishing  sequential  relations. 

Under  such  influences,  a  new  departure  in  rating  methods 
is  a  crying  need,  and  the  first  necessity  is  the  fundamental 
rule  of  action  essential  to  every  scientific  activity.  This 
rule  must  be  an  accurate  definition  of  the  function  of 
fire-rating  in  its  broadest  sense  as  an  activity.  That  fire 
insurance  meets  a  public  need,  aside  from  being  a  mere 
means  of  earning  salaries  and  dividends,  must  be  admitted, 
else  it  could  not  exist.  We  have  been  accustomed  to 
define  this  utility  as  the  distribution  of  fire  destruction 
from  the  individual  to  the  community,  but  in  this  distri- 
bution it  is  necessary  to  consider  something  more  than 
the  individual,  for  each  property  group,  community,  state, 
and  year  may  justly  claim  relief  from  an  excessive  burden 


FIRE-RATING  125 

of  fire  destruction  with  the  same  logic  as  the  individual; 
and  even  the  nation  at  large  may  stagger  under  the  burden 
of  a  smgle  year's  losses,  and  justly  claim  that  these  losses 
shall  be  spread  out  through  a  period  of  years.  This  makes 
it  an  essential  part  of  the  duties  of  fire  insurance  not  only 
to  distribute,  but  to  redistribute  and  re-redistribute,  in 
order  to  avoid  oppressive  taxation.  While  the  above 
definition  may  answer  as  a  broad  statement  of  the  ethical 
obligations  of  fire  insurance  to  the  community,  it  is  not 
a  definition  applicable  to  the  needs  of  a  physical  science. 
If  the  measurement  of  fire  hazard  can  be  done  scientific- 
ally we  must  admit  that  the  activity  of  fire-rating  legiti- 
mately belongs  to  the  family  of  physical  sciences,  and  all 
physical  sciences  deal  with  the  properties  of  waves.  What 
we  need  is  a  generalization  defining  the  function  of  fire- 
rating  as  a  physical  science. 

An  unbiased  consideration  of  the  phenomena  of  fire 
rates  during  recent  years  ought  to  convince  any  sane 
man  that  in  our  refusal  to  permit  rate  waves  to  vibrate 
in  harmonious  sequence  to  cost  waves  we  have  been 
floundering  about  in  the  vain  attempt  to  adapt  an  inflex- 
ible system  to  flexible  conditions.  Like  the  African  who 
ties  up  his  hair  with  cotton  twine  to  take  the  "kinks" 
out  of  it,  we  have  long  struggled  against  nature  in  the 
attempt  to  take  the  kinks  out  of  a  thing  which  stubbornly 
refuses  to  remain  straight. 

Our  persistent  efforts  to  flatten  loss  waves  into  unvary- 
ing rate  lines  have  been  a  long  and  irritating  struggle 
against  the  inexorable  physical  law  of  rhythm,  and  our 
indisposition  or  inability  to  recognize  this  law  has  caused 
endless  trouble  and  misunderstandings  among  ourselves 
and  with  the  public. 

If  it  were  possible  to  conceive  of  a  sea-going  vessel  so 
constructed  as  to  be  unresponsive  to  the  wave  motion  of 
the  ocean,  and  started  on  a  voyage  from  New  York  to 
Liverpool,  we  should  find  it  in  heavy  weather  buried  half 
the  time  under  mountains  of  sea-water,  and  the  other  half 


126  YALE  READINGS  IN  INSURANCE 

paddling  through  space.  Could  we  trace  the  ordinary 
motion  of  sea-going  vessels,  we  should  find  a  profile  view 
of  their  line  of  progress  to  be  invariably  a  modified  form 
of  the  surface  wave.  It  is  as  illogical  to  ignore  the  neces- 
sity of  rhythm  in  fire  rates  as  it  would  be  in  navigation  to 
ignore  the  law  of  wave  motion. 

The  ocean  surface  when  relieved  from  atmospheric 
disturbances  settles  down  to  a  dead  level.  This  level  is 
the  exact  mean  between  the  sum  of  the  wave  protuber- 
ances and  hollows,  so  that  in  a  dead  calm  the  track  of  the 
vessel  and  water  surfaces  would  be  at  all  times  exactly 
parallel.  In  the  same  manner,  between  any  two  given 
points  of  time  there  is  an  average  cost  of  fire  underwriting 
to  l3e  found,  which  is  the  true  mean  between  the  crest 
and  trough  of  the  annual  cost  wave  of  each  class. 

It  is  this  average  cost  which  is  the  real  straight-line, 
the  unchanging  sea-level,  of  every  property  class,  and  it 
is  this  which  we  should  seek  to  establish  as  a  fixed  basis 
for  our  coexistent  relations,  and  our  rates  should  be  per- 
mitted to  fluctuate  above  and  below  this  mean  line  in 
intelligently  modified  waves,  as  determined  by  the  greater 
wave  found  in  the  annual  cost  ratio  of  each  class. 

The  ascertainment  of  the  true  level,  of  average  cost  of 
each  class,  and  the  continuous  control  of  the  rate  wave 
by  reckoning  from  this  as  a  "base  line,"  constitutes  the 
real  problem  of  establishing  sequential  relations,  and  the 
determination  of  this  base  line  is  as  purely  a  question  of 
statistics,  and  ought  to  be  as  free  from  contending  personal 
influences,  as  the  establishment  of  a  principal  meridian 
in  land-surveying,  or  the  determination  of  a  ship's  position 
at  sea. 

It  is  the  object  of  this  inquiry  to  learn  how  this  average 
cost  for  each  class  may  be  determined,  and  how  from  this 
as  a  base,  rate  waves  may  be  so  regulated  as  to  be  in  har- 
mony with  their  loss  wave,  and  at  the  same  time  be  modi- 
fied into  waves  of  endurable  proportions. 

It  is  a  characteristic  of  all  waves  that  they  become 


FIRE-RATING  127 

intolerable  when  the  amplitude  of  vibration  exceeds  cer- 
tain lunits.  Ocean  waves  beyond  a  certain  magnitude 
become  destructive  to  sea-going  craft.  A  deafening  noise, 
a  blinding  light,  a  withering  heat,  an  intolerable  electrical 
discharge,  are  one  and  all  results  of  width  of  vibration  in 
the  media  through  which  they  are  propagated. 

The  well-known  generalization  that  the  intensity  of  all 
wave  motion  increases  in  proportion  to  the  square  of  the 
amplitude  of  vibration,  might  be  said  to  apply  not  only 
to  matter  but  to  mind  and  its  concerns,  for  violent  change 
is  destructive  to  all  human  interests.  Wide  fluctuations 
in  values  create  commercial  panics,  and  in  lesser  degree 
wide  fluctuations  in  fire  rates  are  intolerable  to  the  com- 
munity. 

This  universal  characteristic  of  wave  motion  leads  us 
to  the  unavoidable  inference  that  it  is  the  true  function  of 
fire-rating  in  its  broadest  aspect  to  transmute  annual  cost 
waves  into  rate  waves,  modified  into  proportions  that  will 
be  endurable  to  property  interests.  This  is  the  funda- 
mental rule  from  which  fire-rating  as  a  physical  science 
must  start. 

It  is  probable  that  from  the  earliest  days  of  fire  insur- 
ance the  companies  have  maintained  tabulations  of  their 
experience  with  grouped  hazards.  These  lists  have  slowly 
expanded  in  differing  degrees,  though  some  have  reached 
a  far  more  advanced  stage  of  differentiation  than  others. 
In  the  primitive  days  when  each  company  not  only  had 
the  privilege  of  making  its  own  rates,  but  from  lack  of 
association  was  compelled  to  do  so,  when  competition  was 
so  small  that  it  could  make  rates  which  insured  a  wide 
margin  of  profit,  these  lists  served  as  a  crude  scale  — 
something  like  the  farmer's  fence-rail  and  stone  —  for  the 
quantitative  measurement  of  class  hazards  in  their  sequen- 
tial relations  as  indicated  by  individual  experience;  but 
in  these  days  of  competition,  when  a  company  is  compelled 
to  keep  in  the  swim  by  carrying  all  classes  of  property,  of 


128  YALE  READINGS  IN  INSURANCE 

every  grade  of  desirability,  in  deference  to  the  wishes  of 
more  and  more  exacting  agents,  these  individual  classi- 
fication lists  have  fallen  into  a  sort  of  innocuous  desuetude, 
sur\'iving  like  the  coccyx  and  vermiform  appendix,  the 
remains  of  organs  that  served  their  purpose  during  some 
earlier  stage  of  evolution.  Kept  up  at  a  great  expenditure 
of  time  and  money,  and  carefully  guarded  among  the 
secret  and  sacred  archives  of  each  company,  it  would 
be  difficult  to  determine  what  intelligent  end  these  lists 
serve  at  the  present  time  that  would  not  be  as  well  served 
by  a  Roman  soothsayer's  chicken-gizzard.  Their  utility 
as  a  practical  guide  in  determining  the  relative  profitable- 
ness of  classes  may  be  inferred  form  the  following  tabula- 
tion of  the  comparative  experience  shown  by  a  number 
of  these  individual  lists  for  the  same  five-year  period. 
The  figures  in  the  column  marked  "low"  show  the  loss 
ratio  of  the  company  having  the  most  favorable  experience, 
and  the  figures  in  the  column  marked  "high"  show  the 
loss  ratio  of  the  company  having  the  most  unfavorable 
experience,  with  each  of  the  classes  designated  by  numbers. 
The  column  marked  "combined"  shows  the  combined  loss 
ratio  of  all  the  companies  on  the  same  class  for  the  same 
period : 


FIRE-RATING 


129 


Class  No. 


Loss  Ratios  Shown  by 
Individual  Experience 


Low 


High 


Loss  Ratios 
Shown  by 
Combined 
Experience 


1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

29 

30 

31 

32 

33 


.00 
.10 
.00 
.06 
.18 
.03 
.05 
.19 
.10 
.34 
.12 
.16 
.21 
.18 
.02 
.01 
.08 
.43 
.19 
.04 
.33 
.29 
.16 
.29 
.18 
.13 
.30 
.30 
.22 
.17 
.03 
.10 
.11 


1.11 
2.13 
1.31 
1.88 
1.69 

.92 

.91 
1.05 
1.37 
1.73 
1.32 
1.79 
1.35 
1.29 

.78 
2.11 
2.46 
4.95 
1.11 
1.02 
1.50 
1.05 
1.04 
1.76 
1.03 

.86 
2.64 
1.65 
4.46 

.67 
2.00 
2.16 
1.77 


.53 
.54 
.43 
.66 
.50 
.60 
.60 
.67 
.65 
.58 
.74 
.63 
.44 
.77 
.25 
1.21 
.53 
.97 
.72 
.43 
.61 
.57 
.50 
.62 
.46 
.52 
.64 
.67 
.97 
.43 
.90 
.81 
.47 


130  YALE  READINGS  IN   INSURANCE 

These  classes,  selected  from  the  lists  at  random,  show 
that  with  each  and  every  class  one  company  had  a  very 
low  loss  ratio,  while  another  company  had  a  loss  ratio  that 
would  bring  swift  ruin  had  it  not  had  a  more  favorable 
experience  with  other  classes.  A  mere  glance  down  the 
two  columns  marked  "low"  and  "high "will  show  the  utter 
worthlessness  of  the  separate  experience  of  a  single  com- 
pany as  a  criterion  to  the  average  loss  ratio  of  each  class, 
while  on  the  contrary,  a  comparison  of  these  individual 
experiences  with  the  column  marked  "combined"  shows 
that  there  is  an  established  mean  which,  if  known,  would 
constitute  a  reliable  standard  for  determining  adequate 
class  rates. 

But  further  examination  into  these  individual  lists 
reveals  an  inaccuracy  and  wastefulness  of  method  which 
would  destroy  their  reliability,  even  were  the  experience 
of  each  company  broad  enough  to  constitute  a  reliable 
criterion.  At  a  rough  estimate,  one  hundred  and  fifty 
companies  maintain  these  classification  lists,  at  a  heavy 
expense  for  clerical  work.  During  a  single  year  these 
companies  receive,  let  us  say,  a  total  of  five  million  daily 
reports  of  policies  issued,  each  of  which  contains  a  ver- 
batim copy  of  the  written  portion  of  a  policy.  The  neces- 
sity for  determining  the  proper  class  of  each  daily  report 
received  requires  that  it  be  carefully  scanned  and  its  class 
number  noted  upon  it,  in  order  that  it  may  be  properly 
entered  upon  the  records.  This  work  is  necessarily  done 
in  a  hurried  manner  by  a  clerk  or  examiner  who  cannot 
possibly  give  much  time  or  thought  to  each  daily  report. 
In  many  cases  it  is  impossible  to  tell  from  the  written 
description  how  the  risk  should  be  classed.  In  thousands 
of  cases,  from  fifty  to  one  hundred  companies  receive 
daily  reports  covering  the  same  property  which,  in  the 
hurry  of  current  necessity,  are  entered  haphazard  in  any 
one  of  a  dozen  different  classes  on  the  ledgers  of  the  several 
companies,  and  the  same  work  thus  manifolded  from  fifty 
to  one  hundred  tim.es  creates  a  corresponding  liability  to 


FIRE-RATING 


131 


error.  A  loss  on  a  single  risk,  wi'ongly  classified  destroys 
the  value  of  the  records  of  two  classes.* 

Another  important  element  of  unreliability  in  these 
individual  lists  results  from  the  constant  fluctuation  of 
rates.  The  lists  contain  the  total  premiums  received 
and  the  losses  paid  on  each  class,  a  comparison  of  which 
is  supposed  to  reveal  the  loss  ratio  of  the  class.  This  loss 
ratio,  however,  is  only  useful  in  determining  the  adequacy 
of  rates;  and  with  rates  constantly  changing,  the  standard 
ceases  to  be  a  standard,  and  tabulated  experience  without 
a  standard  of  comparison  is  worthless. 

Let  us  take  for  illustration  the  rates  on  the  dwelling 
class,  which  have  declined  throughout  a  large  portion  of 
the  Northwest  from  25  to  35  per  cent,  during  the  period 
named,  assuming  the  premiums  and  losses  on  the  same 
amount  at  risk  to  have  been  as  follows: 


Year 

Premiums 

Losses 

1892 

$100,000 
90,000 
80,000 
75,000 
66,000 

$50,000 
40,000 

1893 

1894 

45,000 
60,000 

1895 

1896 

50,000 

Total  .  . 

$411,000 

$245,000 

Total  loss  ratio,  60  per  cent. 


Assuming  the  normal  loss  ratio  of  the  class  to  be  55  per 
cent.,  the  average  loss  of  60  per  cent,  shown  by  the  above 
figures  would  indicate  that  dwellings  ought  to  be  advanced 
about  5  per  cent.,  but  if  we  compare  the  last  year's  pre- 
miums with  the  losses  of  that  year,  we  find  the  loss  ratio 

'  In  the  office  of  a  prominent  insurance  company  a  five-thousand 
dollar  line  was  recently  classified  as  a  printing-office  When  a  loss 
occurred,  it  was  accidentally  discovered  that  the  risk  belonged  to  an 
entirely  different  class.  This  single  error  affected  the  company's 
loss  ratio  with  the  one  class  twenty-five  per  cent.,  and  with  the  other 
nearly  one  hundred  per  cent. 


132  YALE  READINGS  IN  INSURANCE 

to  be  about  76  per  cent.,  and  that  dwellings  should  be 
advanced  about  21  per  cent,  from  current  rates,  hence,  any 
attempt  to  fix  rates  from  the  figures  shown  would  be  met 
with  the  question.  From  what  point  shall  rates  be  modified 
—  from  the  highest  point  or  the  lowest  point,  or  from  some 
intermediate  point?  In  other  words,  the  value  of  the 
figures  for  quantitative  reasoning  is  destroyed  by  the 
vacillation  of  one  of  the  quantities  necessary  to  the  com- 
parison. 

Another  element  of  unreliability  in  the  lists  of  individual 
companies  lies  in  the  non-concurrent  grouping  of  classes. 
In  this  respect,  probably  no  two  agree ;  and  in  the  constant 
evolution  of  hazards  (in  the  absence  of  any  common 
source  of  information),  lists  are  in  constant  course  of 
change,  as  determined  by  the  judgment  of  classification 
clerks  under  urgent  necessity  for  immediate  action. 

In  view  of  the  uncertainty  of  grouping,  the  uncertainty 
whether  a  risk,  even  when  properly  grouped,  will  get  into 
the  group  to  which  it  belongs,  and  the  destruction  of  the 
standard  of  measurement  caused  by  rate  fluctuations, 
the  individual  classification  list  as  a  basis  for  quantitative 
measurement  is  by  several  degrees  more  crude  and  primi- 
tive than  the  farmer's  fence-rail  and  stone;  but  as  the 
latter  contained  the  germ  which  has  evolved  into  the 
chemist's  scales  which  will  weigh  an  eyelash,  these  individ- 
ual company  classification  lists  constitute  the  embryo 
which  must  ultimately  evolve  into  a  logical,  uniform,  and 
combined  system  for  the  quantitative  measurement  of 
sequential  relations. 

Ordinary  candor  compels  the  admission  that  the  classi- 
fication of  coexistent  relations  found  in  our  present  tariff 
system  constitutes  the  only  feature  of  fire  insurance  which 
gives  it  the  slightest  right  to  claim  that  it  is  not  a  world- 
wide game  of  guess.  The  same  degree  of  candor  will  not 
permit  us  to  deny  that,  as  a  practical  guide  in  accepting, 
or  rating  risks,  company  classification  lists  in  severalty 
are  worse  than  useless,  because  in  their  limited  way  they 


FIRE-RATING  133 

are  misleading.  It  should  be  borne  in  mind,  however, 
that  these  lists  show  a  distinctly  different  phase  of  classi- 
fication from  that  found  in  our  tariff  system,  for  the 
reason  that  they  constitute  the  embryo  of  a  system  for 
establishing  sequential  relations, 

A  careful  study  of  these  lists  shows  that,  with  all  their 
imperfections,  they  contain  no  fault  that  is  not  easily 
and  inexpensively  remediable.  To  coordinate  these  lists 
into  a  uniform  grouping  of  classes  and  to  combine  the  in- 
dividual experience  of  each  company  into  grand  aggregates, 
showing  the  annual  experience  of  all  companies  with  each 
class,  would  require  neither  violation  of  scientific  pro- 
cedure, nor  departure  from  methods  suggested  rather 
than  established  through  these  individual  classification 
lists.  There  can  be  no  verification  of  sequential  relations 
(which  are  the  combined  effect  of  annual  fire  destruction 
and  the  coexistent  relations  established  through  basis 
tariffs)  except  through  uniform  and  combined  classifica- 
tion. Tliis  is  the  statistical  basis  upon  which  fire-rating 
as  a  science  of  sequential  measurement  must  rest. 

It  would  seem  to  be  a  reflection  upon  the  intelligence 
and  honesty  of  the  fire  underwriting  community  that  dur- 
ing the  past  quarter  of  a  century  every  effort  to  bring 
about  uniform  and  combined  classification  for  the  purpose 
of  establishing  intelligent  sequential  relations  should  have 
been  thwarted  by  a  silent  opposition  which  has  seemingly 
disdained  to  argue  the  question.  It  has  been  charged 
that  this  opposition  emanates  from  a  belief  on  the  part 
of  the  management  of  some  of  the  larger  companies  that, 
under  existing  conditions,  these  companies  possess  advan- 
tages which  would  be  lost  by  the  revelation  of  class  aver- 
ages. It  is  hard  to  believe,  however,  that  the  intelligence 
which  has  brought  these  companies  to  the  front  could  Ije 
blind  to  the  compensating  advantages  which  would  accrue 
from  the  placing  of  fire  insurance  among  the  recognized 
and  legitimate  branches  of  conunercial  activity.  At  most, 
combined   classification   would   simply  establish   averages 


134  YALE  READINGS  IN   INSURANCE 

derived  from  the  experience  of  all.  It  would  not  unseat 
common  sense,  nor  dethrone  the  uidividual  judgment, 
which  itself  has  been  well  defined  as  a  finer  and  more 
discriminating  classification.  The  establishment  of  these 
averages  would  leave  even  greater  advantages  to  under- 
writing ability,  capital,  and  established  reputation  than 
under  existing  conditions,  which  enable  unscrupulous  and 
plunging  methods  not  only  to  upset  the  possibility  of 
legitimate  underwriting,  but  not  infrequently  to  win  a 
greater  financial  success.  Greater  disparities  are  found 
in  the  comparative  success  of  banks,  merchants,  and 
manufacturers,  than  among  fire  insurance  companies, 
because  legitimate  enterprise  gives  ample  scope  for  the 
qualities  necessary  for  success.  Without  doubt,  selfish- 
ness, inertia,  and  ignorance  are  largely  responsible  for  the 
failure  of  fire  insurance  to  realize  the  benefits  of  combined 
classification,  though  it  would  be  as  illogical  to  censure 
the  motives  of  the  fire  underwriting  community  generally 
as  to  censure  the  community  at  large  for  its  inertia  in 
many  important  matters  of  reform  which  do  not  admit 
of  logical  discussion.  "Direct  complicity  with  human 
affairs  is  not  infrequently  a  hindrance  to  the  scientific 
investigation  of  phenomena.  Even  the  axioms  of  geome- 
try would  he  disputed  or  ignored  if  men's  passions  or 
interests  were  concerned  with  them." 

The  English-speaking  peoples  adhere  to  an  orthography 
that  is  the  despair  and  wonder  of  the  world.  We  boast 
of  our  decimal  currency,  but  refuse  to  adopt  a  decimal 
system  of  weights  and  measures,  while  the  complacent 
Briton  refuses  to  adopt  the  decimal  system  for  either 
his  currency,  weights,  or  measures.  During  the  slow 
evolution  of  single-entry  and  then  of  double-entry  book- 
keeping, the  English  government  stubbornly  adhered  to 
a  primitive  system  of  keeping  accounts  by  cutting  notches 
in  sticks.  It  would  probably  be  usmg  this  system  yet  had 
not  a  conflagration  in  1884  burned  up  all  its  exchequer 
tallies.     Inertia  hath  its  uses,  however,     "The  man  who 


FIRE-RATING  135 

will  not  look  at  the  new  moon,  out  of  respect  to  that 
ancient  institution,  the  old  moon,"  was  not  created  in 
vain.  Perhaps  it  is  fortunate  that  combined  classifica- 
tion was  not  started  too  soon,  for  a  false  start  might  have 
brought  the  system  into  disrepute,  and  it  is  always  easier 
to  start  anew  than  to  undo  and  patch  up  a  system  full  of 
errors.  To-day,  however,  fire  insurance  is  in  the  position 
of  the  British  government  when  its  exchequer  tallies  were 
burned.  Many  states  have  destroyed  our  rating  system, 
such  as  it  is,  by  anticompact  laws;  many  others  are  threat- 
ening to  do  so,  and  a  new  start  is  inevitable.  If  we  start 
along  lines  that  cannot  be  justified  by  scientific  reasoning 
at  every  point,  so  much  the  worse  for  us,  for  we  will  ulti- 
mately be  compelled  to  tear  down  our  system  and  rebuild 
from  the  foundation. 


CHAPTER  VII 

SCIENTIFIC   FIRE-RATING  * 

All  forms  of  insurance  are  alike  in  two  things;  they 
indemnify  for  loss,  and  they  do  so  by  means  of  an  applica- 
tion of  the  laws  of  probability.  In  gambling  parlance, 
insm-ance  is  "a  hedge."  That  is  to  say,  it  is  the  direct 
opposite  of  gambling.  It  does  not  take  chances  but, 
instead,  cancels  them.  Man  is,  by  the  laws  of  nature, 
subject  to  various  uncertainties  of  fortune^  as  to  health, 
life,  preservation  of  property,  etc.  This  liability  he  can- 
not escape  directly,  but  he  may  nullify  the  financial  hazard 
by  means  of  insurance.  Thus  insurance  is  to  him  not  a 
gamble  but  a  hedge. 

It  is  sometimes  erroneously  said  that  companies  which 
engage  in  insurance  are  gambling.  If  they  took  a  few 
risks  only,  the  charge  wo\ild  be  true;  but  we  shall  see  that 
the  fundamental  principle  of  the  law  of  probabilities  is 
that  when  a  large  group  is  considered,  chance  is  very 
nearly  eliminated  and  the  aggregate  loss  may  be  estimated 
within  narrow  limits,  so  that  the  purveying  of  indemnity 
is  no  more  a  speculation  than  dealing  in  sugar  or  calico, 
nor  indeed  so  much.  Therefore,  by  means  of  insurance  we 
find  that  not  merely  is  the  hazard  of  the  individual  offset, 
but  also  that  the  hazard  when  passed  over  to  the  company 
and  combined  with  others,  results  in  a  reasonably  reliable 
loss  ratio  which  is  transmuted  into  a  moderate  tax  upon 

1  By  Miles  M.  Dawson,  Consulting  Actuary,  New  York  City.  Re- 
printed from  pages  56-67  of  the  "Proceedings  of  the  Thirty-Second 
Annual  Meeting  of  the  Fire  Underwriters'  Association  of  the  North- 
west." 

136 


SCIENTIFIC  FIRE-RATING  137 

all  who,  being  subject  to  the  same  risk  of  loss,  have  thus 
sought  protection. 

The  laws  of  probability  were  practically  unknown  to  the 
ancients,  though  insurance  in  a  very  interesting  form  was 
practised  in  Greece  and  Rome.  The  form  was  in  loans 
to  owners  of  vessels  and  cargoes  at  rates  of  interest  far 
exceeding  the  usual  upon  safe  securities,  it  being  stipulated 
that  the  loan  should  not  be  repaid  at  all  if  the  property 
were  destroyed.  Insurance,  therefore,  made  its  first 
appearance  as  the  handmaid  of  commerce,  which  office  has 
been  in  later  centuries  performed  by  it  in  a  degree  that 
was  inconceivable  then.  Of  course,  the  additional  interest 
upon  such  a  loan  was  in  reality  an  insurance  premium, 
charged  as  a  consideration  for  the  risk.  Indeed,  as  has 
been  shown  in  our  day,  a  considerable  part  of  the  interest 
upon  loans  is  in  almost  all  cases  really  a  premium  charged 
because  of  the  risk  of  the  principal.  But  in  those  days, 
while  the  thing  was  known,  its  nature  was  not  fully  under- 
stood. 

The  mathematical  law  of  probability  may  be  stated  as 
follows :  If  in  a  large  group  of  persons,  for  instance,  to  each 
of  whom  a  certain  thing  appears  a  priori  equally  likely  to 
happen,  it  does  actually  happen  within  a  certain  time  to  a 
certain  number,  then  the  risk  that  such  will  happen  to  one 
person  in  the  group  within  such  time  may  be  represented 
by  a  fraction  of  which  the  number  to  whom  the  thing 
happened  is  the  numerator  and  the  number  composing  the 
group  is  the  denominator.  This  may  be  stated  in  another 
way  which  may  be  even  clearer,  viz.:  This  fraction  will 
accurately  represent  the  probability  that  a  given  man  in 
the  group  was  one  of  those  to  whom  the  thing  has  happened. 
For,  indeed,  the  application  of  this  principle  to  future 
happenings  calls  for  an  additional  generalization  and  also 
for  careful  testing  to  determine  whether  the  group  was 
large  enough  to  furnish  a  reliable  average  and  whether 
the  classification  really  admitted  none  but  like  hazards. 
Even  then  the  result  must  be  accepted  as  a  guide  for  future 


138  YALE  READINGS  IN   INSURANCE 

estimates  of  the  value  of  a  hazard  with  caution,  until 
repeated  testing  has  proved  the  correctness  of  the  deduc- 
tions in  every  respect. 

But,  so  far  as  the  mere  law  itself  is  concerned,  it  is  as 
well  stated  when  we  seek  the  chance  that  the  event  has 
happened  to  a  particular  man  in  the  past  as  when  we 
estimate  the  probability  that  it  will  happen  to  a  given  man 
in  the  future.  It  is  this  unity  of  the  law  of  probability 
that  makes  it  useful  as  a  means  of  prevision,  and,  therefore, 
as  a  foundation  for  insurance.  We  know  the  law  to  be 
reliable  and  we  surmise  that  this,  in  turn,  is  because  other 
laws,  causing  the  phenomena  which  we  are  attempting 
to  forecast,  are  themselves  working  with  even  and  reliable 
regularity.  In  other  words,  our  study  of  probabilities 
leads  us  to  the  conclusion  that,  strictly  speaking,  there  is 
no  such  thing  as  chance  —  though,  so  far  as  the  power  of 
the  individual  to  control  events  is  concerned,  of  course 
there  is  and  must  be;  but  that  causes  are  continually  at 
work  which  explain  all  that  happens  and  that,  if  our 
knowledge  of  these  causes  were  perfect,  we  should  find 
ourselves  in  a  world  of  certainty.  It  follows,  therefore, 
that  no  grouping  is  or  can  be  perfect,  for,  if  we  could 
know  all  the  forces  that  are  in  operation,  we  should  not 
merely  know  which  in  the  group  were  out  of  place  there  but 
we  should  also  know  to  which  alone  the  event  would  happen 
and  they  alone  would  be  in  place  there.  It  follows,  there- 
fore, that  it  is  our  task  to  classify  and  reclassify,  knowing 
that  at  best  the  grouping  is  imperfect  and  knowing  also 
that  if  it  ever  became  perfect,  not  only  would  our  labors 
be  at  an  end,  but  that  there  would  no  longer  be  probabili- 
ties, but  merely  certainties,  and  that  insurance  would  be 
impossible.  It  is  clear  then,  that  insurance  and  the  science 
of  probabilities  are  both  ephemeral  things  which  will  pass 
away  when  man's  knowledge  is  all-embracing.  Perhaps, 
however,  the  time  during  which  this  omniscience  is  evolv- 
ing, will  be  sufficient  for  our  purpose ;  and  we  have  at  least 
this  encouraging  consideration  that,  if  the  grouping  could 


SCIENTIFIC  FIRE-RATING  139 

be  perfect,  as  our  critics  sometimes  think  or  at  least  say 
that  it  ought  to  be,  it  would  also  be  useless.  Strangely- 
enough,  then,  its  utility  depends  upon  its  incompleteness 
and  imperfection.  But  we  are  not  on  that  account  to 
neglect  grouping  things  together  which  seem  to  us  most 
nearly  alike;  for,  do  what  we  will  in  that  regard,  there  will 
be  imperfections  enough  in  the  selection,  you  may  be  sure. 

In  fire  insurance,  where  the  determination  of  the  amount 
of  a  premium  has  been  empirical,  as  a  rule,  you  have  seen 
a  remarkable  development  in  classification  which,  had  it 
been  accompanied  by  a  similar  evolution  of  scientific 
rate-making,  would  by  this  time  have  put  you  in  possession 
by  easy  stages  of  the  most  wonderfully  and  perfectly 
adapted  system  known.  Unfortunately,  it  was  not  so 
accompanied  and  the  work  of  determining  cost  ratios, 
which  are  hazard  ratios,  has  been  deferred  until  this 
complexity  has  been  introduced  by  the  necessities  of  com- 
petition. The  most  serious  and  important  obstacles  in 
the  way  of  at  this  time  making  fire-rating  a  science  arise 
from  the  great  complexity  of  these  classifications,  none 
of  which  existed  in  the  beginning.  We  have  classifications 
by  construction,  by  occupancy,  by  exposures,  and  each 
of  these  has  sub-classifications,  almost  without  end. 
Then,  as  we  shall  see,  it  is  also  considered  desirable  to 
group  by  territories  and  likewise  by  time,  measured  by 
terms  of  years  if  not  by  single  years.  It  is  this  which 
makes  the  labor  of  preparing  the  ratios  seem  so  great, 
and,  indeed,  to  many  impossible  —  this,  and  the  enormous 
mass  of  data  involved  in  each  group.  If  the  work  had 
been  entered  upon  when  there  was  little  attempt  at  classi- 
fication, it  would  have  been  easy;  and  since  it  would  have 
kept  pace  with  the  complexity  which  time  has  introduced, 
and  indeed  would  doubtless  have  suggested  and  deter- 
mined that  complexity,  it  would  not  now  be  difficult  to 
keep  the  machine  in  motion. 

In  life  insurance,  to  digress  for  a  moment,  the  develop- 
ment has,  in  this  country  especially,  also  been  one-sided. 


140  YALE  READINGS  IN  INSURANCE 

The  science  of  probabilities,  together  with  its  application 
to  rate-making  and  other  problems,  has  been  brought  to 
great  perfection;  but  the  grouping  has  been  into  one  class 
only,  viz.:  lives,  accepted  as  first-class,  while  lives  which 
fell  below  the  standard  were  unable  to  secure  insurance  at 
all.  Naturally  such  a  system  has  resulted  in  many  lives 
being  accepted  which  were  regarded  as  on  the  line  or  very 
near  it;  and  within  the  year  the  American  Society  of 
Actuaries  has,  on  the  suggestion  of  Emory  McClintock, 
Actuary  of  the  Mutual  Life,  and  the  greatest  living  member 
of  the  profession  in  this  country,  begun  as  its  first  great 
work,  to  construct  with  the  cooperation  of  the  principal 
companies  mortality  tables  from  their  experiences  for 
classes  of  lives,  distinguished  by  heredity,  occupation, 
personal  characteristics,  and  history.  This  is  a  great  task, 
comparable  only,  perhaps,  to  the  work  which  we  are  dis- 
cussing, that  of  classifying  and  ordering  the  statistics  of 
fire  insurance  companies,  so  as  to  determine  the  ratios 
of  loss  as  to  each  class.  It  is  significant,  perhaps,  that 
both  branches  of  insurance,  which  have  in  the  past  been 
so  one-sided  in  the  development  of  their  rate-making 
systems,  though  in  ways  diametrically  opposite,  should 
now  apparently  be  approaching  the  same  goal  of  system- 
atized and  thoroughly  classified  statistical  tables,  showing 
the  cost  by  classes.  Fire  insurance  should,  it  seems  to 
me,  come  out  with  the  most  perfect  and  useful  tables; 
and  what  is  needed  in  life  insurance  is,  perhaps,  not  so 
much  further  classification  of  lives  that  have  all  along  been 
accepted  but  information  as  to  rates  which  would  be  safe 
for  the  one-sixth  part  of  those  who  have  applied  that  have 
been  rejected.  This  information  the  investigation  will 
not  develop  and  consequently  the  experiments  in  the  field 
of  insuring  impaired  lives  are  being  made  by  means  of 
empirical  modifications  of  the  rates  with  eyes  open  for 
everything  that  can  guide  the  classification.  The  fire 
insurance  companies  have,  taking  all  of  them  into  account, 
embraced  about  all  classes  of  property  that  are  subject 


SCIENTIFIC  FIRE-RATING  141 

to  the  hazard  of  destruction  by  fire.  The  one-sided 
development  of  the  business  has  not  been  narrow  as  has 
been  the  case  in  Hfe  insurance  to  a  lamentable  degree. 

Perhaps  a  definition  of  the  meaning  which  is  by  me 
attached  to  the  word  "empirical"  may  not  be  out  of 
place.  The  fixing  of  a  price,  however  cleverly  and  shrewdly 
done,  without  actually  computing  the  costs,  is  an  empiri- 
cal act.  Most  prices  are  thus  fixed,  to  a  great  degree;  for, 
while  the  sellers  are  loth  to  sell  for  less  than  cost,  circum- 
stances at  times  compel  it  and,  on  the  other  hand,  they 
are  rarely  slow  to  accept  large  profits  over  the  cost  if 
opportunity  offers.  But  it  is  another  matter  for  one  to 
be  offering  his  goods  in  the  market  without  knowing 
whether  the  price  he  names  is  above  or  below  the  cost. 
This  was  the  condition,  however,  in  railway  rates  until 
very  recently.  There  the  rule  of  the  markets:  "Charge 
all  that  the  traffic  will  bear"  was  and  is  yet  followed;  but 
there  is  this  difference  between  the  old  days  and  these, 
that  then  the  wisest  managers  did  not  know  when  they 
were  underbidding  the  cost,  while  now  there  is  close  figur- 
ing done  continually  to  determine  that  very  matter. 
The  situation  in  fire  insurance'  has  been  similar  to  this. 
In  both  cases,  it  reflects  great  credit  upon  the  acumen, 
skill,  and  judgment  of  the  men  who  have  directed  the  busi- 
ness that  the  consequences  have  not  been  more  ruinous; 
for  they  had  nothing  but  the  general  result  from  year  to 
year  to  guide  them. 

In  railroading,  I  have  been  informed,  the  old  system, 
while  frequently  l^ringing  out  reliable  profits  from  the 
whole  business  from  year  to  year,  was  found  to  have 
caused  the  greatest  inequalities  and  inequities,  when  it 
was  once  thoroughly  examined  into.  It  has  been  reported 
that  the  hasty  and  imperfect  investigation  of  fire  insur- 
ance experience  that  was  recently  made,  showed  a  similar 
state  of  affairs.  I  may  add  that  tiiis  was  also  until  re- 
cently the  fact,  in  a  large  degree,  in  a  business  so  remote 
from   insurance   as  banking.     Bankers,   whether   making 


142  YALE  READINGS  IN  INSURANCE 

or  losing  money  on  the  whole  business,  have  not  infre- 
quently had  little  idea  which  customers,  aside,  of  course, 
from  the  largest  of  them  where  the  facts  stuck  out,  as  it 
were,  paid  a  profit  to  the  bank  or  even  compensated  it 
for  services  rendered.  But  in  the  best  and  largest  banking 
houses  this  is  now  changed  and  close  track  is  kept  of  each 
account  by  an  infallible  system,  so  that  the  banker  knows 
of  a  certainty  whether  the  account  is  profitable.  Thus, 
in  leading  New  York  banks,  the  account  is  duplicated  by 
entries,  showing  when  the  value  of  deposited  paper  is 
actually  reduced  to  possession  by  collection  of  the  same. 
Similar  investigations  also  as  to  the  cost  of  collecting 
caused  the  adoption  of  the  charge  for  collection  of  out- 
of-town  checks  by  the  New  York  Clearing  House. 

You  will  observe  that  in  all  the  four  great  businesses 
which  I  have  mentioned,  fire  insurance,  life  insurance, 
railroading,  and  banking,  the  development  has  been  from 
dealing  with  heterogeneous  or  mixed  groups  as  if  they  were 
of  one  sort,  to  dealing  with  smaller  and  more  thoroughly 
homogeneous  groups.  It  is  the  mastery  of  details  that 
counts  in  business  nowadays  and,  the  larger  the  business, 
the  more  imperative  is  the  demand  for  this  classification 
and  study  of  details. 

The  more  classifications  there  are  to  be  handled,  the 
larger  must  be  the  statistical  data  from  which  deductions 
are  made.  The  reason  for  this  is  that  each  classification 
stands  wholly  or  in  large  part  by  itself  and  the  ratio  of 
loss  must  be  determined  for  it  separately,  just  as  if  it  were 
the  only  class.  Laying  aside  the  question  for  the  time, 
whether  one  period,  on  account  of  improvements  or  the 
contrary,  is  to  be  considered  to  have  involved  more  or 
less  risk  of  fire,  the  groups  can  be  made  up  of  different 
years'  exposures,  the  losses  for  various  years  in  that  class 
being  summed  also  to  make  a  total.  In  this  w^ay,  a  suffi- 
ciently broad  basis  may  sometimes  be  found  for  ratios 
in  a  class  where  the  exposures  in  a  single  year  are  too 
few  to  yield  a  reliable  average.    The  enormous  mass  of 


SCIENTIFIC  FIRE-RATING  143 

details  which  make  up  the  experiences  of  the  fire  insurance 
companies  is,  in  view  of  these  things,  seen  to  be  a  benefit 
and  advantage,  and  perhaps  well  worth  all  the  additional 
labor  which  it  entails.  For,  by  reason  of  the  great  abun- 
dance of  the  material,  it  ought  to  be  able  to  attain  at  least 
the  following  desirable  ends,  viz.:  Thoroughly  reliable 
conclusions  as  to  the  cost  of  insurance  as  to  all  the  larger 
and  more  important  classifications,  including  much  infor- 
mation concerning  the  causes  of  fires  in  these  classes, 
giving  a  basis  for  extra  charges  and  for  credits  as  well; 
reasonably  definite  measurements  of  the  hazards  in  all 
the  less  important  classifications,  the  data  being  in  each 
case  much  more  plentiful  than  could  otherwise  have  been 
expected. 

The  value  of  a  broad  basis  is  well  known  to  you  all,  and 
yet  I  am  sure  that  an  illustration  will  not  be  out  of  place. 
Common  sense  teaches  us  that,  for  instance,  in  tossing  a 
cent  the  chances  are  even  whether  it  shall  turn  up  head  or 
tail.  But  if  it  be  thrown  but  once,  it  must  have  turned  up 
one  or  the  other,  and  if  a  judgment  were  based  upon  that 
throw  only,  we  would  have  a  certainty.  And  experience, 
as  well  as  reason,  teaches  that  there  is  no  certainty  that  it 
will  turn  up  once  one  way  and  once  the  other  in  two  throws; 
nor  just  half  the  tmie  one  way  and  just  half  the  time  the 
other  way  in  four  throws  or  any  other  small  number  of 
throws.  But  what  we  mean  by  saying  that  the  chances 
are  even,  is  that  in  a  very  large  number  of  throws  the 
number  of  heads  and  the  number  of  tails  will  be  nearly 
the  same,  and  that  in  an  infinite  number  of  throws  they 
would  be  just  the  same.  We  expect  the  ratios  found  by 
actual  throwing  the  coin,  to  correspond  more  closely  to 
the  chances  which  we  determined  by  reasoning  about  the 
matter,  the  larger  the  number  of  throws.  In  the  same 
way,  the  average  fire  loss  which  is  drawn  from  a  very  large 
number  of  exposures  will  more  accurately  correspond  to 
the  real  probability;  and,  other  things  being  equal,  it  will 
be  more  reliable,  the  more  exposures  it  is  drawn  from. 


144  YALE  READINGS  IN  INSURANCE 

In  order  to  get  this  broad  basis,  several  companies, 
indeed  many  companies,  will  need  to  pool  their  statistics. 
This  has  been  a  stumbling-block  in  the  past,  but  is  not 
likely  to  be  such  in  the  future,  when  the  advantages  and 
the  safety  of  such  procedure  are  fully  understood.  I  well 
remember  the  expression  of  disgust  with  which  the  sug- 
gestion was  received  by  a  friend  of  mine,  high  in  the  fire 
insurance  world,  more  than  ten  years  ago.  The  feeling 
was  at  the  time  that  such  a  thing  could  be  accomplished 
only  by  so  exposing  the  experience  of  the  individual 
company,  that  all  its  underwriting  mistakes  would  be  an 
open  book  to  its  rivals.  In  addition  to  this  humiliation, 
the  managers  also  saw  the  possibility  that  their  under- 
writing successes  would  give  such  indications  to  their 
rivals,  that  the  advantage  which  they  had  enjoyed  would 
soon  be  lost. 

Of  course,  the  statistics  of  the  experiences  of  the  com- 
panies could  be  pooled  in  a  manner  to  involve  just  such 
disadvantages.  Each  company  might  digest  its  totals 
by  classes  and  give  in  the  results,  exposing  its  own  mistakes 
and  successes.  But  if  it  were  done  in  this  way,  in  addition 
to  this  objection,  there  would  be  the  further  objection  that 
the  grouping  would  have  to  be  wholly  predetermined,  the 
data  could  not  be  rearranged  as  occasion  seemed  to  de- 
mand, and  the  persons  charged  with  responsibility  for 
the  results  could  not  know  certainly  that  the  grouping 
had  been  made  in  precisely  the  form  desired,  so  that  their 
conclusions  were  drawn  from  just  the  facts  they  assumed 
to  be  true.  The  experiences  of  life  insm'ance  companies 
could  have  been  collected  in  a  similar  manner  to  make 
mortality  tables;  but  they  never  have  been,  and  few  actu- 
aries would  be  willing  to  assume  responsibility  for  the 
result,  if  they  were.  The  form  in  which  the  material  is 
collected  is,  instead,  in  individual  risk  histories  on  cards. 
And,  as  soon  as  the  cards  come  in,  they  lose  their  identity 
so  far  as  the  company  is  concerned,  and,  in  any  event, 
they  are  not  combined  so  as  to  show  to  anybody  what 


SCIENTIFIC  FIRE-RATING  145 

that  company's  individual  experience  has  been.  Of 
course,  in  collecting  the  data  for  the  pool,  a  company  may 
and,  indeed,  should  put  the  same  together  for  its  own 
guidance  and  advice.  But  it  will  not  be  known  to  other 
companies  and,  moreover,  will  be  of  greater  value  to  the 
company  itself,  when  it  can  compare  its  own  experience 
with  the  experience  of  all.  The  task  of  reporting  this 
mass  to  a  central  body  in  such  a  manner  may  seem  gigan- 
tic, but  it  is  really  no  more  labor  than  to  digest  the  data 
before  sending  it  in.  It  is  better  and  more  economical  to 
have  the  sorting  done  by  one  set  of  clerks,  and  under  the 
supervision  of  the  committee  in  charge.  The  same  indi- 
vidual cards,  too,  are  likely  in  such  case  to  be  employed 
successively  for  different  purposes,  falling  into  new  groups 
one  after  another  until  all  the  information  which  they 
give  is  extracted. 

Mention  has  already  been  made  of  the  desirability  of 
having  the  material  fluid,  so  to  speak,  so  that  it  may  be 
grouped  into  new  and  unexpected  classifications,  instead 
of  being  required  to  fall  into  predetermined  classes.  All 
fire  insurance  men  have  preconceptions  as  to  what  the 
statistics,  when  thus  brought  together,  will  demonstrate. 
In  order  to  deal  with  the  subject  at  all,  it  will  be  necessary 
for  the  committee  in  charge  to  recognize  these  precon- 
ceptions, as  a  means  of  determining  the  first  forms  of 
classification.  But  the  first  grouping,  however  skilfully 
made,  is  never  likely  to  prove  wholly  correct.  Many  of 
the  preconceptions  are  sure  to  be  erroneous;  and,  when 
this  is  shown,  the  material  should  be  in  such  form  that  new 
groupings,  suggested  by  the  facts  as  they  develop,  may  be 
adopted. 

There  is  one  sort  of  hazard  which  deserves  to  be  put 
to  one  side  for  separate  consideration;  that  is  the  con- 
flagration hazard.  Two  things  appear  to  be  clear  about 
it  from  the  outset,  viz.,  first,  that  to  get  any  sort  of  meas- 
urement for  it,  many  apparently  unlike  hazards  in  all 
other  regards  must  be  grouped  together  and,  second,  that 


146  YALE  READINGS  IN  INSURANCE 

in  order  to  get  an  average,  periods  much  longer  than  one 
year  must  be  employed.  When  the  method  of  properly 
measuring  this  hazard  has  been  arrived  at,  it  will  also 
involve  the  necessity  for  recognizing,  that  reserves  to 
cover  it  must  take  into  account  a  period  of  much  more 
than  one  year.  Then  the  truth  will  come  to  light,  that 
much  of  the  funds  which  are  now  held  as  surplus,  are  really 
reserves  against  this  conflagration  hazard,  and  that  it  is 
wisdom  to  accumulate  such  and  folly  to  fail  to  do  so. 
The  liability  on  this  account  reminds  one  of  what  the 
actuaries  call  ''suspended  mortality"  in  life  insurance. 
This  means  that  the  company  which  assumes  that,  because 
at  younger  ages  it  shows  a  great  saving  on  the  mortality 
estimates,  the  same  salvage  will  apply  straight  through, 
forgets  that  the  men  who  failed  to  die  at  forty,  are  merely 
reserved  to  make  a  larger  number  of  deaths  at  the  higher 
ages.  Thus  conflagrations  are  not  expected  every  year, 
and  such  portion  of  the  premium  as  represents  this  hazard 
is  not  released  when  the  year  has  passed,  unless  the  risk 
is  wholly  off  the  books. 

This  reference  calls  to  mind  the  safety  fund  law  of  New 
York,  which  is,  in  a  way,  a  recognition  of  this  necessity 
for  a  special  conflagration  reserve.  Its  defect  seems  to 
me  to  be  that  instead  of  being  a  provision  directly  to 
cover  the  conflagration  -risk,  it  is  only  indirectly  so,  since 
it  acts  as  a  special  protection  of  other  policy-holders 
against  their  reserve  values  being  swallowed  up  by  the 
conflagration. 

The  inquiry  is  surely  pertinent,  in  view  of  the  trouble 
and  expense  which  such  an  undertaking  as  this  investiga- 
tion would  occasion,  what  is  the  good  of  the  ratios  any- 
how? Many  consider  that  rates  are  made  by  competition, 
and  that  the  idea  of  securing  uniform  rates  without 
combination  is  a  foolish  dream.  And  they  reason  that, 
since  combination  is  necessary  in  order  to  sustain  rates, 
and  since  by  means  of  combination  it  is  already  demon- 
strated that  they  can  be  kept  high  enough  to  pay  a  good 


SCIENTIFIC  FIRE-RATING  147 

profit,  the  expense  and  labor  to  ascertain  costs  would  be 
wasted. 

Much  of  this  contention  is  justified.  Too  much  must 
not  be  expected  of  the  mere  ascertainment  of  the  costs. 
In  manufactures,  for  instance,  the  cost  is  usually  perfectly 
well  known  to  all  parties.  Yet  undue  competition  has 
often  brought  about  absolutely  ruinous  conditions,  and 
the  excuse  which  is  most  frequently  offered  for  trusts  and 
combinations,  is  the  practical  impossibility  of  carrying 
on  the  business  at  all  under  free  competition.  Yet  it  is 
even  worse  to  compete  without  knowing  what  you  are 
losing  when  a  certain  price  is  made.  In  these  very  periods 
of  cut-throat  competition,  the  manufacturer  who  has 
most  completely  in  hand  the  information  about  costs, 
is  enabled  to  inflict  far  worse  injuries  than  he  receives, 
while  his  adversary  strikes  in  the  dark  and  often  injures 
himself  instead  of  his  antagonist. 

Surely  it  is  irrational  to  carry  on  a  business  in  such  a 
manner.  Moreover,  the  fact  that  it  is  thus  carried  on, 
cannot  be  hidden  from  others  and  it  creates  unusual 
resistance  to  rating  schedules.  Men  resent  changes  in 
their  rates,  anyhow,  but  yet  more  do  they  fight  against 
them  when  they  can  set  their  judgment  up  against  the 
underwriter,  knowing  that  the  latter  cannot  assign  a 
reason  for  his  opinion,  and  is,  in  fact,  in  doubt  whether 
the  rate  should  be  so  much  or  so  much.  Well  do  I  per- 
sonally recall  the  effect  of  a  rating  upon  the  property 
owners  in  the  country  town  where  I  was  brought  up  —  a 
rating  which  involved  doubling  many  premiums.  It  was 
not  comprehensible  to  the  business  men  that  these  risks 
were  good  at  the  old  rates  the  day  before,  but  required 
the  new  on  that  day.  It  takes  good  grounds  to  justify 
such  to  the  mind  of  the  average  man.  And  the  resent- 
ment and  ill-feeling  occasioned  in  this  manner  and  fomented 
by  the  surmise  that  the  rate-makers  do  not  know  that  the 
new  rates  are  correct,  result  in  movements  against  the 
companies,  in  laws  against  combinations  and  the  like. 


148  YALE  READINGS  IN  INSURANCE 

But  it  is  not  merely  as  a  means  to  avoid  this  sort  of 
prejudice  that  accurate  information  as  to  costs  would  be 
useful.  The  fact  that  rates  were  thus  determined  would 
gain  the  good  will  of  many.  This  information  in  simple 
form,  would  satisfy  men  that  their  interests  were  guarded 
in  the  working  out  of  these  problems,  and.  that  care  was 
taken  to  make  rates  in  proportion  to  the  value  of  the  pro- 
tection. In  my  own  short  experience  as  a  fire  insurance 
man,  I  remember  that  a  little  talk  about  the  underlying 
principles  of  insurance  more  than  once  disarmed  prejudice. 
If  these  fundamental  principles  were  strictly  regarded,  as 
they  would  be  under  a  system  of  scientific  rating,  it  is 
difficult  to  see  how  a  business  man  could  offer  a  fair  excuse 
for  objecting  to  pay  what  experience  showed  to  be  his  just 
share  of  the  losses  and  expenses  of  the  business. 

If  the  tariff  associations  were  abandoned,  it  is  true  that 
the  mere  fact  that  the  costs  had  been  accurately  ascer- 
tained might  not  restrain  undue  competition.  It  would, 
however,  be  likely  to  have  a  steadying  effect  upon  rates 
and  might  serve  ordinarily  to  confine  the  competition 
within  narrow  limits.  Such,  in  any  event,  has  been  the 
effect  in  life  insurance,  so  far  as  the  regular  companies 
are  concerned.  Moreover,  since  the  purchaser  of  fire 
insurance  buys  a  promise,  instead  of  a  commodity,  rates 
that  are  cut  too  much  might,  if  the  fact  could  be  shown, 
create  such  fear  of  the  security  of  the  company  as  would 
cure  the  evil  or  keep  it  within  bounds.  It  would  be  foolish 
to  say  that  this  effect  can  be  depended  upon,  for  we  have 
the  fact  to  face  that  for  many  years  assessment  life  in- 
surance has  been  liberally  patronized,  although  charging 
rates  so  insufficient  that  the  safety  of  the  insurance  was 
imperiled.  You  also  have  known  many  instances  where 
doubtful  fire  insurance  has  readily  been  accepted  in  order 
to  save  a  little  on  the  premiuns.  Wliile  this  is  tru€,  how- 
ever, the  fact  that  most  of  the  fire  insurance  is  in  companies 
that  decline  to  meet  the  competition  of  notoriously  unsafe 
concerns,  shows  that  most  business  men  do  value  security 


SCIENTIFIC  FIRE-RATING  149 

above  a  saving  in  rates.  When  the  facts  concerning  the 
cost  of  fire  insurance  have  come  to  hght  as  to  each  classi- 
fication, companies  that  for  a  time  seek  to  do  business  at 
rates  that  are  below  cost  can  be  made  to  appear  notori- 
ously unsafe  very  readily,  because  they  really  would  be 
so.  Such  would  rarely  be  backed  by  substantial  capital 
and  would  not  be  feared. 

Another  most  important  advantage  that  should  flow 
from  this  determination  of  the  costs  of  fire  insurance  is 
that  it  ought  to  contribute  very  much  to  the  solution 
of  the  commission  problem.  It  is  well  known  that  the 
difficulties  concerning  commissions  had  their  origin  in 
the  fact  that  certain  classes  of  hazards  were  known  to  be 
more  profitable  than  others,  and  this,  not  because  of  the 
superior  skill  of  one  company  over  another  in  selecting 
risks  of  that  class,  but  because  of  the  fact  that  the  rates 
were  higher  in  proportion  to  the  hazard.  These  classes 
came  to  be  known  as  preferred,  and,  while  the  Western 
Union  companies  were  doing  nothing  to  show  their  pref- 
erence for  them,  the  non-union  companies  were  emphasizing 
their  choice  by  offering  much  larger  commissions  for  pre- 
ferred risks.  With  the  costs  accurately  ascertained,  the 
gross  premiums  may  be  made  to  accord  with  the  net,  with 
the  same  margin  for  expenses  and  profits,  or  with  a  different 
margin,  as  is  thought  wisest,  and  level  or  graded  commis- 
sions will  be  provided  for,  precisely  as  the  companies 
prefer.  Moreover,  it  will  be  in  their  power  to  make  any 
class  of  risks  more  or  less  profitable  by  changing  the  margin, 
and  thus  to  take  it  out  of  the  possibilities  that  lai-ger 
commissions  shall  be  offered  than  all  are  able  and  willing 
to  pay. 

Reference  has  already  been  made  to  the  steadying  effect 
which  the  mere  fact  that  the  costs  have  been  ascertained, 
will  be  likely  to  have  upon  rates.  This  steadying  effect, 
however,  would  be  greatly  increased  if  this  cost  were  made 
the  basis  of  reinsurance  reserves  as  reported  to  the  depart- 
ments instead  of  such  reserves  being  based  upon  gross 


150  YALE  READINGS  IN   INSURANCE 

premiums  as  at  present.  By  "gross  premiums"  I  mean 
the  actual  premium  receipts  for  the  year,  "net"  in  the  sense 
that  cancellations  and  the  like  have  been  deducted.  At 
the  present  time  a  company  gets  off  with  a  smaller  reserve 
charge,  the  more  insufficient  its  premiums  have  been. 
Thus,  if  it  accepts  business  for  half  rates,  its  reserves  are 
half  as  much  as  if  its  rates  were  full.  In  this  manner 
insolvency  is  sometimes  concealed  for  a  time  and  the  state's 
certificate  of  solvency  becomes  vain.  In  a  recent  annual 
report  of  the  Massachusetts  department,  public  attention 
was  called  to  the  fact  that  by  means  of  reinsurance  an 
insolvent  company  might  transfer  its  business  to  a  con- 
cern that  was  not  more  solvent  in  point  of  fact,  but  that 
made  an  appearance  of  solvency,  if  charged  under  the  rules 
with  a  reserve  liability  for  only  one-half  the  reinsurance 
premium,  however  inadequate  that  might  be. 

The  question  is  pertinent  whether  the  cost  schedules 
would  be  likely  to  be  accepted  by  state  legislatures  as 
standards  of  solvency.  As  to  this  nobody  can  surely  say; 
but  w^e  do  know  that  a  scientific  reserve  was  adopted  as  to 
life  insurance  companies  and  that  the  presence  of  this 
legal  standard  has  had  a  wonderful  steadying  influence 
upon  life  insurance  premiums  in  the  regular  companies. 

In  this  connection,  it  is  worthy  of  remark  that  the  legal 
reserve  rules  as  to  the  valuation  of  life  policies  have  not 
brought  about  absolute  uniformity  as  to  life  insurance 
premiums.  There  are  many  variations;  but  these  are  kept 
within  reasonably  narrow  limits.  In  consequence,  there 
is  not  much  complaint  about  these  differences.  It  must 
be  conceded,  though,  that  the  problem  in  fire  insurance 
is  different;  for  in  life  insurance  considerations  as  to  the 
profit-earning  power  of  the  various  companies  influence 
the  choices,  as  also  do  personal  preferences  and  especial 
confidence  in  particular  institutions.  In  fire  insurance, 
on  the  contrary,  so  long  as  the  company  is  safe,  there  is 
never  much  choice,  and  so  the  cheapest  bidder  gets  the 
risk  as  a  mere  matter  of  business.     But,  on  the  other 


SCIENTIFIC  FIRE-RATING  151 

hand,  it  does  not  follow  that  because  in  life  insurance  an 
equilibrium  of  rates  has  not  been  the  result  of  scientific 
reserve  systems,  it  would  fail  to  be  the  consequence  of  the 
adoption  of  such  a  system  of  fire  insurance  reserves. 

It  is  possible,  too,  that  the  companies  might  turn  to 
the  very  device  for  assuring  that  they  can  collect  ample 
premiums  that  has  long  been  employed  by  life  insurance 
companies,  viz.,  to  make  the  policies  participating.  This 
was  tried  in  fire  insurance  many  years  ago,  but  had  little 
then  to  recommend  it.  Now,  however,  the  competition 
is  hard  and  close  and  it  is  possible  that  often  the  insured 
would  attest  his  confidence  that  the  rates  should  be  materi- 
ally lower  by  being  willing  to  pay  the  higher  rate,  provided 
the  insurance  was  written,  so  that  his  policy  would  par- 
ticipate in  the  profits.  Life  insurance  companies  have  by 
this  means  been  enabled  to  collect  one-fourth  or  more  over 
the  stock  or  non-participating  rates,  every  cent  of  which 
extra  premium  is  available  if  needed,  to  pay  losses  or 
expenses.  In  fire  insurance,  of  course,  great  care  would 
need  to  be  exercised,  and  if  this  excess  were  subject  to  the 
payment  of  commissions,  there  might  be  no  possibility  of 
making  the  plan  work.  But,  operated  with  caution,  it 
might  work  all  right,  giving  the  insured  lower  actual  cost, 
while  assuring  the  company  against  the  possibility  of 
coming  out  behind.  This  may  prove  to  be  the  ultimate 
solution  of  the  problem  of  j)i'oviding  flexible  premiums,  in 
spite  of  the  fixed  cost  ratios  which  investigation  would 
discover. 

'  Another  benefit  that  might  flow  from  the  establishment 
of  a  joint  statistical  bureau  is  that,  gradually  by  a  process 
of  extension,  the  indemnity  furnished  by  fire  insurance 
companies  might  be  widened  to  cover  many  risks  which 
are  now  tabooed.  Thus  the  hazard  of  loss  by  explosion 
might  be  investigated  and,  instead  of  excluding  this  risk 
of  property  loss,  it  might  be  included.  Insurance  is  more 
valuable,  the  more  inclusive  it  is;  and,  where  the  risk  of 
loss  from  one  cause  is  slight,  it  can  hardly  be  covered 


152  YALE  READINGS  IN  INSURANCE 

except  in  connection  with  other  hazards  to  the  same 
property.  In  a  hke  manner,  the  risk  of  the  collapse  of 
a  building  might  be  covered.  As  to  the  subject  matter 
of  insurance,  there  might  also  be  the  extension  to  cover 
profits  which  a  business  man  loses  through  the  stoppage 
of  his  business  when  his  property  is  destroyed.  Remun- 
eration for  such  lost  profits  is  nowadays  strictly  ruled  out 
by  all  companies;  if  this  could  be  covered  safely,  it  would 
be  well.  In  London,  according  to  the  press  reports,  the 
need  for  such  insurance  has  become  so  pronounced,  that 
a  separate  company  has  been  organized  to  furnish  it. 

It  has  been  argued  that  the  ratios  which  would  be 
arrived  at,  would  be  vitiated  by  the  fact  that  insurances 
for  full  value  and  insurances  for  only  a  part  of  the  value 
would  be  grouped  together.  It  is,  to  be  sure,  well  known 
that  both  overinsurance  and  underinsurance  have  their 
perils  for  the  company.  Thus  overinsurance  tends  to 
induce  incendiarism,  and  underinsurance  results  in  much 
protection  being  furnished  for  a  small  premium.  Since 
most  losses  are  partial  and,  indeed,  for  small  parts  of  the 
value,  a  policy  for  one-half  the  value  or  less  often  calls 
for  as  large  a  payment  on  the  part  of  the  companies  as  if 
it  had  been  for  full  insurance. 

We  have  already  seen  that  there  can  be  no  claim  that 
the  classification  is  perfect  and,  in  fact,  that  a  perfect 
classification  would  be  useless.  In  this  regard,  it  must  be 
conceded,  I  am  confident,  that  the  classification  cannot 
be  homogeneous.  The  cost  as  ascertained,  will  be  higher, 
by  some  percentage  not  yet  measurable,  than  it  should  be 
when  full  but  not  excessive  insurance  is  carried,  and  lower 
than  when  a  very  small  part  of  the  value  is  insured  or 
when  excessive  insurance  is  taken.  But  the  cost  ratios 
will  represent  the  average,  insurance  being  taken  as  men 
desire  to  take  it,  some  too  much,  some  too  little,  many 
approximately  the  right  amount.  These  are,  perhaps, 
in  the  present  stage  of  the  business  and  of  our  knowledge 
the  most  useful  ratios  we  could  have.     Deductions  from 


SCIENTIFIC  FIRE-RATING  153 

rates,  based  upon  such  costs,  might  be  allowed  when  full 
insurance  is  taken,  and  this  is  doubtless  the  best  form  for 
such  discrimination  to  take  —  much  preferable  to  fining 
the  insured  for  not  carrying  full  insurance  and  less  likely 
to  arouse  resentment  and  cause  retaliation  in  the  form  of 
adverse  legislation. 

It  has  V)een  asked  again  and  again,  what  effect  these 
ratios  would  be  likely  to  have  upon  the  schedule  system 
which  has  been  so  widely  introduced  and  which  unques- 
tionably has  served  a  very  good  purpose.  It  must  be 
replied  that  nobody  knows  in  advance.  If  anybody  did 
know  just  what  the  ascertainment  of  these  ratios  will 
reveal  and  could  prove  to  others  that  he  knew  it,  much 
expense  and  trouble  might  be  spared  us.  For  myself,  I 
have  been  interested  in  the  Universal  Mercantile  Schedule 
from  the  moment  I  heard  of  the  idea,  and  I  procured  a 
copy  as  soon  as  I  could.  It  seemed  to  me  then  and  it 
seems  to  me  now  both  a  step  toward  more  intelligent 
treatment  of  the  question  and  also  an  absolutely  necessary 
precursor  of  scientific  rating,  showing  the  general  methods 
which  must  be  pursued  and  also  the  necessity  for  cost 
ratios,  based  upon  actual  experience,  by  means  of  which 
to  construct  a  schedule,  perfect  and  reliable.  It  has 
seemed  to  me  to  be  a  sort  of  John  the  Baptist  crying  in 
the  wilderness,  or  a  schoolmaster  to  bring  us  to  Christ. 
There  can  be  no  doubt  that  the  results  of  an  investigation 
will  indicate  the  desirability  of  schedule  rating  and  nobody, 
of  course,  will  welcome  more  heartily  the  changes  in  the 
present  schedules,  no  matter  how  radical  and  sweeping, 
if  correct  and  founded  upon  substantiated  facts,  than  the 
able  and  ingenious  gentlemen  to  whose  prevision  of  the 
coming  conditions  and  to  whose  indefatigable  labors  we 
owe  the  present  schedule.  Scientific  rating  comes  not  to 
destroy  the  law  nor  the  "profits,"  let  us  hope,  but  to  ful- 
fU. 

Let  us  see  what  the  investigation  might  be  expected  to 
yield  in  the  way  of  information  that  would  throw  light 


154  YALE  READINGS  IN  INSURANCE 

upon  the  schedule.  First  of  all,  it  ought  to  be  able  to 
determine  for  each  class  the  loss  ratios  from  various  as- 
signed causes,  differentiating  also  by  comparing  smaller 
groups,  as  to  risks  with  and  without  certain  improvements 
and  fire-fighting  appliances.  By  this  process  a  close  esti- 
mate, first,  of  the  residual,  unverified  cost,  and  then  of  the 
costs  because  of  deficiencies,  etc.,  might  be  made.  Surely 
many  things,  that  in  the  opinions,  even  of  persons  who  are 
most  favorable  to  scientific  rate-making  must  yet  remain 
subjects  for  empirical  modifications  of  the  rates,  are  likely 
during  such  an  investigation,  if  properly  conducted,  to 
take  definite  form  and  in  some  cases  to  yield  thoroughly 
reliable  ratios  for  extra  charges  or  allowances. 

Naturally  the  investigation,  if  attempted,  would  cover 
separate  ratios  for  various  territorial  divisions  and  also 
ratios  for  different  periods  of  time.  These,  together  with 
the  reports  as  to  ratios  of  loss  from  different  causes  of 
fire,  might  solve  the  question  which  has  troubled  so  many 
underwriters,  whether  there  really  is  something  in  mere 
locality  which  affects  the  fire  ratios  favorably  or  unfavor- 
ably. The  bearing  of  this  investigation  upon  the  Uni- 
versal Mercantile  Schedule,  just  because  it  claims  to  be 
universal,  is  manifest. 

Proper  classifications  will  also  enable  the  committee 
in  charge  of  such  an  investigation  to  determine  the  in- 
fluence upon  the  fire  loss  ratios,  of  single  and  multiple 
occupancies,  of  various  sorts  of  occupancies,  of  exposures 
of  every  sort  and  nature.  Such  investigations  will  be 
intricate  and  it  will  greatly  facilitate  them  if  the  informa- 
tion comes  on  cards,  in  the  manner  already  indicated,  so 
that  they  may  be  shuffled  about  and  grouped  again  and 
again  for  different  purposes.  It  ought  to  be  possible  to 
extract  all  the  information  that  will  be  useful  before  the 
card  is  cast  aside;  and,  in  order  to  do  this,  the  amount  of 
information  contained  upon  each  card  will  not  need  to  be 
multifarious.  Comparatively  simple  groupings  only  should 
be  called  for. 


SCIENTIFIC   FIRE-RATING  155 

The  labor  of  conducting  such  an  investigation  will  be 
very  great  because  of  the  enormous  mass  of  material  to  be 
digested  and  because  of  the  number  of  classifications  that 
will  be  needed.  But,  while  arduous,  the  work  will  not  be 
difficult  and  will  in  the  end  prove  simple  and  easy.  None 
of  the  intricate  and  puzzling  mathematical  problems  which 
actuaries  have  to  deal  with,  when  handling  life  insurance 
statistics,  will  here  be  encountered.  A  perfectly  clear 
head,  a  firm  grasp  upon  the  objects  to  be  attained  and  un- 
failing insight  into  the  methods  by  which  the  same  may 
be  secured,  will  help  over  the  worst  difficulties  in  classify- 
ing such  a  mass  and  drawing  proper  deductions  from  its 
statistics.  The  task  would  not  be  regarded  formidable  by 
skilled  statisticians,  except  on  the  ground  of  the  amount 
of  data,  and  even  that  is  not  great  when  compared  with 
the  statistics  which  are  often  treated  in  connection  with 
a  national  census.  There  is  certainly  nothing  insuperable 
in  the  difficulties  of  the  task;  and  the  work  ought  not  to 
involve  expense  at  all  comparable  to  the  probable  value 
of  the  results. 


CHAPTER  VIII 

STANDARD   FIRE   INSURANCE   POLICY  * 

1,  The fire  insurance  company  in  consider- 
ation of  the  stipulations  herein  named  and  of 

dollars  premium,  does  insure for  the  term  of 

from  the day  of 190  . . ,  at 

noon,  to  the day  of 190. . ,  at  noon, 

against  all  direct  loss  or  damage  by  fire,  except  as  herein- 
after provided,   to  an  amount  not  exceeding 

dollars,  to  the  following  described  property  while  located 
and  contained  as  described  herein,  and  not  elsewhere, 
to  wit: 

2,  This  company  shall  not  be  liable  beyond  the  actual 
cash  value  of  the  property  at  the  time  any  loss  or  damage 
occurs,  and  the  loss  or  damage  shall  be  ascertained  or 
estimated  according  to  such  actual  cash  value,  with  proper 
deduction  for  depreciation  however  caused,  and  shall  in 
no  event  exceed  what  it  would  then  cost  the  insured  to 
repair  or  replace  the  same  with  material  of  like  kind  and 
quality;  said  ascertainment  or  estimate  shall  be  made  by 
the  insured  and  this  company,  or,  if  they  differ,  then  by 
appraisers,  as  hereinafter  provided;  and,  the  amount  of 
loss  or  damage  having  been  thus  determined,  the  sum  for 
which  this  company  is  liable  pursuant  to  this  policy  shall 
be  payable  sixty  days  after  due  notice,  ascertainment, 
estimate,  and  satisfactory  proof  of  the  loss  have  been 
received  by  this  company  in  accordance  with  the  terms 
of  this  policy.     It  shall  be  optional,  however,  with  this 

^  A  copy  of  the  printed  conditions  of  the  New  York  standard  fire 
insurance  poUcy. 

156 


STANDARD  POLICY  FORM  157 

company  to  take  all,  or  any  part,  of  the  articles  at  such 
ascertained  or  appraised  value,  and  also  to  repair,  rebuild, 
or  replace  the  property  lost  or  damaged  with  other  of  like 
kind  and  quality  within  a  reasonable  time  on  giving 
notice,  within  thirty  days  after  the  receipt  of  the  proof 
herein  required,  of  its  intention  so  to  do;  but  there  can  be 
no  abandonment  to  this  company  of  the  property  described. 

3,  This  entire  policy  shall  be  void  if  the  insured  has 
concealed  or  misrepresented,  in  writing  or  otherwise,  any 
material  fact  or  circumstance  concerning  this  insurance 
or  the  subject  thereof;  or  if  the  interest  of  the  insured  in 
the  property  be  not  truly  stated  herein;  or  in  case  of  any 
fraud  or  false  swearing  by  the  insured  touching  any  matter 
relating  to  this  insurance  or  the  subject  thereof,  whether 
before  or  after  a  loss. 

4.  This  entire  policy,  unless  otherwise  provided  by 
agreement  indorsed  hereon  or  added  hereto,  shall  be  void 
if  the  insured  now  has  or  shall  hereafter  make  or  procure 
any  other  contract  of  insurance,  whether  valid  or  not,  on 
property  covered  in  wliole  or  in  part  by  this  polic}';  or  if 
the  subject  of  insurance  be  a  manufacturing  establishment 
and  it  be  operated  in  whole  or  in  part  at  night  later  than 
ten  o'clock,  or  if  it  cease  to  be  operated  for  more  than  ten 
consecutive  days;  or  if  the  hazard  be  increased  by  any 
means  within  the  control  or  knowledge  of  the  insured;  or 
if  mechanics  be  employed  in  building,  altering,  or  repair- 
ing the  within-described  premises  for  more  than  fifteen 
days  at  any  one  time;  or  if  the  interest  of  the  insured  be 
other  than  unconditional  and  sole  ownership ;  or  if  the  sub- 
ject of  insurance  be  a  building  on  ground  not  owned  by 
the  insured  in  fee-simple ;  or  if  the  subject  of  insurance  be 
personal  property  and  be  or  become  incumbered  by  a 
chattel  mortgage;  or  if,  with  the  knowledge  of  the  insured, 
foreclosure  proceedings  be  commenced  or  notice  given  of 
sale  of  any  property  covered  by  this  policy  by  virtue  of 
any  mortgage  or  trust  deed;  or  if  any  change,  otlier  than 
by  the  death  of  an  insured,  take  i)lacc  in  the  interest,  title, 


158  YALE  READINGS  IN  INSURANCE 

or  possession  of  the  subject  of  insurance  (except  change 
of  occupants  without  increase  of  hazard),  whether  by  legal 
process  or  judgment  or  by  voluntary  act  of  the  insured, 
or  otherwise;  or  if  this  policy  be  assigned  before  a  loss;  or 
if  illuminating  gas  or  vapor  be  generated  in  the  described 
building  (or  adjacent  thereto)  for  use  therein;  or  if  (any 
usage  or  custom  of  trade  or  manufacture  to  the  contrary 
notwithstanding)  there  be  kept,  used,  or  allowed  on  the 
above-described  premises,  benzine,  benzole,  dynamite, 
ether,  fireworks,  gasoline,  greek  fire,  gunpowder  exceeding 
twenty-five  pounds  in  quantity,  naphtha,  nitro-glycerine 
or  other  explosives,  phosporus,  or  petroleum  or  any  of 
its  products  of  greater  inflammability  than  kerosene  oil 
of  the  United  States  standard  (which  last  may  be  used  for 
lights  and  kept  for  sale  according  to  law,  but  in  quantities 
not  exceeding  five  barrels,  provided  it  be  drawn  and  lamps 
filled  by  daylight  or  at  a  distance  not  less  than  ten  feet  from 
artificial  light);  or  if  a  building  herein  described,  whether 
intended  for  occupancy  by  owner  or  tenant,  be  or  become 
vacant  or  unoccupied  and  so  remain  for  ten  days. 

5.  This  company  shall  not  be  liable  for  loss  caused 
directly  or  indirectly  by  invasion,  insurrection,  riot,  civil 
war  or  commotion,  or  military  or  usurped  power,  or  by 
order  of  any  civil  authority;  or  by  theft;  or  by  neglect  of 
the  insured  to  use  all  reasonable  means  to  save  and  pre- 
serve the  property  at  and  after  a  fire  or  when  the  property 
is  endangered  by  fire  in  neighboring  premises;  or  (unless 
fire  ensues,  and,  in  that  event,  for  the  damage  by  fire  only) 
by  explosion  of  any  kind,  or  lightning;  but  liability  for 
direct  damage  by  lightning  may  be  assumed  by  specific 
agreement  hereon. 

6.  If  a  building  or  any  part  thereof  fall,  except  as  the 
result  of  fire,  all  insurance  by  this  policy  on  such  building 
or  its  contents  shall  immediately  cease. 

7.  This  company  shall  not  be  liable  for  loss  to  accounts, 
bills,  currency,  deeds,  evidences  of  debt,  money,  notes,  or 
securities;    nor,    unless    liability    is    specifically    assumed 


STANDARD  POLICY  FORM  159 

hereon,  for  loss  to  awnings,  bullion,  casts,  curiosities, 
drawings,  dies,  implements,  jewels,  manuscripts,  medals, 
models,  patterns,  pictures,  scientific  apparatus,  signs,  store 
or  office  furniture  or  fixtures,  sculpture,  tools,  or  property 
held  on  storage  or  for  repairs;  nor,  beyond  the  actual 
value  destroyed  by  fire,  for  loss  occasioned  by  ordinance 
or  law  regulating  construction  or  repair  of  buildings,  or 
by  interruption  of  business,  manufacturing  processes,  or 
otherwise;  nor  for  any  greater  proportion  of  the  value 
of  plate  glass,  frescoes,  and  decorations  than  that  which  this 
policy  shall  bear  to  the  whole  insurance  on  the  building 
described. 

8.  If  an  application,  survey,  plan,  or  description  of 
property  be  referred  to  in  this  policy  it  shall  be  a  part  of 
this  contract  and  a  warranty  by  the  insured. 

9.  In  any  matter  relating  to  this  insurance  no  person, 
unless  duly  authorized  in  writing,  shall  be  deemed  the  agent 
of  this  company. 

10.  This  policy  may  by  a  renewal  be  continued  under 
the  original  stipulations,  in  considei'ation  of  premium  for 
the  renewed  term,  provided  that  any  increase  of  hazard 
must  be  made  known  to  this  company  at  the  time  of 
renewal  or  this  policy  shall  be  void. 

11.  This  policy  shall  be  canceled  at  any  time  at  the  re- 
quest of  the  insured;  or  by  the  company  by  giving  five 
days'  notice  of  such  cancellation.  If  this  policy  shall  be 
canceled  as  hereinbefore  provided,  or  become  void  or  cease, 
the  premium  having  been  actually  paid,  the  unearned 
portion  shall  be  returned  on  surrender  of  this  policy  or 
last  renewal,  this  company  retaining  the  customary  short 
rate;  except  that  when  this  policy  is  canceled  by  this 
company  by  giving  notice,  it  shall  retain  only  the  pro  rata 
premium. 

12.  If,  with  the  consent  of  this  company,  an  interest 
under  this  policy  shall  exist  in  favor  of  a  mortgagee  or 
of  any  person  or  corporation  having  an  interest  in  the  sub- 
ject of  insurance,  other  than  the  interest  of  the  insured 


160  YALE  READINGS  IN  INSURANCE 

as  described  herein,  the  conditions  hereinbefore  contained 
shall  apply  in  the  manner  expressed  in  such  provisions 
and  conditions  of  insurance  relating  to  such  interest  as 
shall  be  written  upon,  attached,  or  appended  hereto. 

13.  If  property  covered  by  tliis  policy  is  so  endangered 
by  fire  as  to  require  removal  to  a  place  of  safety,  and  is 
so  removed,  that  part  of  this  policy  in  excess  of  its  propor- 
tion of  any  loss  and  of  the  value  of  property  remaining 
in  the  original  location  shall,  for  the  ensuing  five  days  only, 
cover  the  property  so  removed  in  the  new  location;  if 
removed  to  more  than  one  location,  such  excess  of  this 
policy  shall  cover  therein  for  such  five  days  in  the  propor- 
tion that  the  value  in  any  one  such  new  location  bears 
to  the  value  in  all  such  new  locations;  but  this  company 
shall  not,  in  any  case  of  removal,  whether  to  one  or  more 
locations,  be  liable  beyond  the  proportion  that  the  amount 
hereby  insured  shall  bear  to  the  total  insurance  on  the 
whole  property  at  the  time  of  fire,  whether  the  same  cover 
in  new  location  or  not. 

14.  If  fire  occur,  the  insured  shall  give  immediate 
notice  of  any  loss  thereby  in  writing  to  this  company, 
protect  the  property  from  further  damage,  forthwith 
separate  the  damaged  and  undamaged  personal  property, 
put  it  in  the  best  possible  order,  make  a  complete 
inventory  of  the  same,  stating  the  quantity  and  cost  of 
each  article  and  the  amount  claimed  thereon;  and,  within 
sixty  days  after  the  fire,  unless  such  time  is  extended  in 
writing  by  this  company,  shall  render  a  statement  to  this 
company,  signed  and  sworn  to  by  said  insured,  stating  the 
knowledge  and  belief  of  the  insured  as  to  the  time  and 
origin  of  the  fire;  the  interest  of  the  insured  and  of  all 
others  in  the  property ;  the  cash  value  of  each  item  thereof 
and  the  amount  of  loss  thereon;  all  encumbrances  thereon; 
all  other  insurance,  whether  valid  or  not,  covering  any  of 
said  property;  and  a  copy  of  all  the  descriptions  and 
schedules  in  all  policies;  any  changes  in  the  title,  use, 
occupation,    location,    possession,    or    exposures   of    said 


STANDARD  POLICY  FORM  161 

property  since  the  issuing  of  this  pohcy;  by  whom  and 
for  what  purpose  any  building  herein  described  and  tiie 
several  parts  thereof  were  occupied  at  the  time  of  fire; 
and  shall  furnish,  if  required,  verified  plans  and  specifica- 
tions of  any  building,  fixtures,  or  macliinery  destroyed 
or  damaged;  and  shall  also,  if  required,  furnish  a  cer- 
tificate of  the  magistrate  or  notary  public  (not  interested 
in  the  claim  as  a  creditor  or  otherwise,  nor  related  to  the 
insured)  living  nearest  the  place  of  fire,  stating  that  he  has 
examined  the  circumstances  and  believes  the  insured  has 
honestly  sustained  loss  to  the  amount  that  such  magistrate 
or  notary  public  shall  certify. 

15.  The  insured,  as  often  as  required,  shall  exhibit  to 
any  person  designated  by  this  company  all  that  remains 
of  any  property  herein  described,  and  submit  to  examina- 
tions under  oath  by  any  person  named  by  this  company, 
and  subscribe  the  same;  and,  as  often  as  required,  shall 
produce  for  examination  all  books  of  account,  bills,  in- 
voices, and  other  vouchers,  or  certified  copies  thereof 
if  originals  be  lost,  at  such  reasonable  place  as  may  be 
designated  by  this  company  or  its  representative,  and  shall 
permit  extracts  and  copies  thereof  to  be  made. 

16.  In  the  event  of  disagreement  as  to  the  amount  of 
loss  the  same  shall,  as  above  provided,  be  ascertained  by 
two  competent  and  disinterested  appraisers,  the  insui-ed 
anrl  this  company  each  selecting  one,  and  the  two  so  chosen 
shall  first  select  a  competent  and  disinterested  umpire; 
the  appraisers  together  shall  then  estimate  and  appraise 
the  loss,  stating  separately  sound  value  and  damage,  and, 
failing  to  agree,  shall  submit  their  differences  to  the  um- 
pire; and  the  award  in  writing  of  any  two  shall  determine 
the  amount  of  such  loss;  the  parties  thereto  shall  pay  the 
appraiser  respectively  selected  by  them  and  shall  bear 
equally  the  expenses  of  the  appraisal  and  umpire. 

17.  This  comi)any  shall  not  be  held  to  have  waived  any 
provision  or  condition  of  this  policy  or  auy  forfeiture 
thereof  by  any  requirement,  act,  or  proceeding  on  its  part 


162  YALE  READINGS  IN  INSURANCE 

relating  to  the  appraisal,  or  to  any  examination  herein 
provided  for;  and  the  loss  shall  not  become  payable  until 
sixty  days  after  the  notice,  ascertainment,  estimate,  and 
satisfactory  proof  of  the  loss  herein  required  have  been 
received  by  this  company,  including  an  award  by  ap- 
praisers when  appraisal  has  been  required. 

18.  This  company  shall  not  be  liable  under  this  policy 
for  a  greater  proportion  of  any  loss  on  the  described  prop- 
erty, or  for  loss  by  and  expenses  of  removal  from  premises 
endangered  by  fire,  than  the  amount  hereby  insured  shall 
bear  to  the  whole  insurance,  whether  valid  or  not,  or  by 
solvent  or  insolvent  insurers,  covering  such  property,  and 
the  extent  of  the  application  of  the  insurance  under  this 
policy  or  of  the  contribution  to  be  made  by  this  company 
in  case  of  loss,  may  be  provided  for  by  agreement  or  con- 
dition written  hereon  or  attached  or  appended  hereto. 
Liability  for  reinsurance  shall  be  as  specifically  agreed 
hereon. 

19.  If  this  company  shall  claim  that  the  fire  was  caused 
by  the  act  or  neglect  of  any  person  or  corporation,  private 
or  municiiml,  this  company  shall,  on  payment  of  the  loss, 
be  subrogated  to  the  extent  of  such  payment  to  all  right 
of  recovery  by  the  insured  for  the  loss  resulting  therefrom, 
and  such  right  shall  be  assigned  to  this  company  by  the 
insured  on  receiving  such  payment. 

20.  No  suit  or  action  on  this  policy,  for  the  recovery  of 
any  claim,  shall  be  sustainable  in  any  court  of  law  or  equity 
until  after  full  compliance  by  the  insured  with  all  the  fore- 
going requirements,  nor  unless  commenced  within  twelve 
months  next  after  the  fire. 

21.  Wherever  in  this  policy  the  word  "insured"  occurs, 
it  shall  be  held  to  include  the  legal  representative  of  the 
insured,  and  wherever  the  word  "loss"  occurs,  it  shall 
be  deemed  the  equivalent  of  "loss  or  damage." 

22.  If  this  policy  be  made  by  a  mutual  or  other  company 
having  special  regulations  lawfully  applicable  to  its  organ- 
ization, membership,  policies,  or  contracts  of  insurance, 


STANDARD  POLICY  FORM  163 

such  regulations  shall  apply  to  and  form  a  part  of  this 
policy  as  the  same  may  be  written  or  printed  upon,  at- 
tached, or  appended  hereto. 

23.  This  policy  is  made  and  accepted  subject  to  the 
foregoing  stipulations  and  conditions,  together  with  such 
other  provisions,  agreements,  or  conditions  as  may  be 
indorsed  hereon  or  added  hereto,  and  no  officer,  agent, 
or  other  representative  of  this  company  shall  have  power 
to  waive  any  provision  or  condition  of  tliis  policy  except 
such  as  by  the  terms  of  this  policy  may  be  subject  of 
agreement  indorsed  hereon  or  added  hereto,  and  as  to 
such  provisions  and  conditions  no  officer,  agent,  or  repre- 
sentative shall  have  such  power  or  be  deemed  or  held  to 
have  waived  such  provisions  or  conditions  unless  such 
waiver,  if  any,  shall  be  written  upon  or  attached  hereto, 
nor  shall  any  privilege  or  permission  affecting  the  insurance 
under  this  policy  exist  or  be  claimed  by  the  insured  unless 
so  written  or  attached. 


CHAPTER  IX 

THE  NATURE   OF  THE   POLICY   CONTRACTS  * 

The  whole  theory  of  fire  insurance  is  logically  derived 
from  the  axiom  that  insurance  is  a  means  of  providing 
indemnity  for  loss.  This  principle  as  applied  to  the  opera- 
tions of  fire  insurance  can  be  illustrated  as  follows: 

''A  fire  insurance  policy  is  a  contract  to  indemnify  the 
holder  thereof  for  actual  destruction,  by  a  certain  imme- 
diate cause,  i.e.,  fire,  of  value  appertaining  to  certain 
specified  property  owned  by  him." 

The  thing  to  be  noticed  is  that  only  actual  immediate 
damage  is  covered  by  insurance;  that  is,  damage  which 
is  attributable  directly  to  the  fire,  or  which  is  the  immedi- 
ate result  of  fire.  Thus  a  fire  insurance  company  insuring 
a  stock  of  merchandise  would  in  case  of  loss  be  liable  for 
the  value  of  the  property  actually  consumed,  and  also 
damage  to  the  remaining  property  caused  by  fire,  smoke, 
and  the  process  of  extinguishing  the  fire.  It  would  not 
be  liable,  however,  for  any  loss  caused  by  the  interruption 
or  derangement  of  business  and  consequent  loss  of  profit. 

An  insurance  policy  is  a  personal  contract.  It  does  not 
follow  the  property,  nor,  properly  speaking,  insure  it  at  all, 
though  the  language  of  the  day  gives  a  contrary  impression. 
It  is  an  agreement  to  indemnify  a  policy-holder  for  the 
loss  accruing  to  him  personally  by  reason  of  the  destruction 
or  damage  of  certain  property.  Accordingly,  no  person 
who  is  not  the  owner  of  the  property  burned,  or  who  has 

1  By  Richard  M.  Bissell,  Vice-President  of  the  Hartford  Fire  Insur- 
ance Company,  Hartford.  Reprinted  from  pages  37-65  of  the  "  Yale 
Lectures  on  Insurance,  Fire  and  Miscellaneous." 

164 


NATURE  OF  CONTRACTS  165 

no  interest  in  it,  can  be  a  claimant  against  an  insurance 
company.  Nor  can  an  owner  make  claim  on  account  of 
any  other  property  than  that  directly  mentioned  or  logi- 
cally implied  in  the  policy  itself.  All  policies,  therefore, 
should  clearly  set  forth  the  description  of  tlie  property  to 
be  insured  and  the  interest  of  the  policy-holder  therein. 
While  no  one  can  insure  property  unless  he  has  a  valuable 
interest  therein,  any  kind  of  an  interest  which  can  be 
valued  in  cash  may  be  insured.  Accordingly,  a  man  who 
loans  money  on  a  building  acquires  an  interest  in  it,  and 
he  may  insure  that  interest,  either  separately,  or,  as  is  the 
custom,  in  conjunction  with  the  owner  of  the  building, 
both  interests  being  covered  by  one  contract.  A  pur- 
chaser who  has  paid  in  part  for  property  which  he  may 
not  receive  until  full  payment  is  made,  acquires  an  interest 
which  may  be  protected  by  insurance.  A  life  interest 
in  property,  also  the  reversionary  interest  of  the  final 
legatee,  may  be  insured.  In  fact,  any  tangible,  valuable 
interest  in  any  kind  of  property  may  he  made  the  subject 
of  an  insurance  policy.  It  is  a  maxim  of  the  business, 
however,  that  the  value  of  all  such  interests  must  not 
exceed  the  actual  cash  value  of  the  property  itself. 

In  addition  to  the  interests  already  mentioned,  it  is 
possible  to  insure  against  the  loss  of  almost  any  ascer- 
tainable value  which  is  subject  to  obliteration  or  deprecia- 
tion by  fire.  Thus,  the  rental  income  of  a  building  may 
be  insured  by  a  contract  which  will  make  good  the  loss 
of  rent  during  the  time  the  building  is  rendered  untenant- 
able by  fire.  So,  also,  in  certain  cases,  what  is  called  the 
use  and  occupancy  of  a  manufacturing  plant;  that  is  to 
say,  its  ability  to  turn  out  the  appropriate  finished  product 
in  regular  quantities,  may  be  insured  against  interruptions 
by  fire. 

The  property  to  be  insured  must  be  definitely  described. 
A  policy  so  written  as  to  cover  a  stock  of  l)oots  and  shoes 
will  not  also  cover  dry  goods,  nor  will  a  policy  insuring  a 
building  also  insure  outbuildings  or  awnings.     The  written 


166  YALE  READINGS  IN  INSURANCE 

description  forming  part  of  every  policy  must  either  specifi- 
cally mention  everything  to  be  insured,  or  must  be  couched 
in  such  broad  terms  as  to  include  everything  for  which 
protection  is  desired.  Thus  a  contract  insuring  merchan- 
dise would  protect  everything  kept  for  sale,  the  word 
''merchandise"  being  very  broad  in  its  connotation; 
whereas  a  contract,  as  above,  insuring  a  stock  of  boots 
and  shoes,  would  cover  nothing  else. 

In  order  to  appreciate  the  relations  which  exist  between 
a  fire  insurance  company  and  the  insured  we  must  bear  in 
mind  the  following  facts,  which  will  also  indicate  the 
reasons  for  the  carefully  drawn  and  somewhat  stringent 
contracts  by  which  insurance  is  undertaken. 

In  the  first  place,  property  covered  by  insui-ance  is  not 
only  for  the  most  part  in  the  custody  of  the  insured,  but 
is  usually  occupied,  operated,  or  handled  by  him.  More- 
over, and  this  is  even  more  important,  the  information 
upon  which  the  insurance  is  based  is  furnished  by  the 
insured,  hence  the  obvious  opportunities  for  fraud  which 
the  stringent  policy  conditions  are  intended  to  prevent  — 
an  intention  which  is  only  partially  accomplished,  as  the 
experience  of  every  company  will  demonstrate.  In  this 
connection  a  comment  from  a  New  York  court  will  be 
appropriate : 

"In  negotiating  a  contract  of  insurance  the  parties  are 
not  upon  a  level,  nor  do  they  deal  at  arm's  length.  The 
insurer,  i.e.,  the  company,  is  presumed  to  be  ignorant,  and 
the  insured  informed  in  respect  to  the  subject  to  be  insured. 
Hence,  in  forming  the  contract,  the  insurer,  except  he 
undertake  to  inquire  for  himself,  does  not  rely  on  his  own 
resources,  but  reposes  exclusively  on  the  intelligence 
communicated  by  the  insured.  And  hence,  further,  the 
parties  occupying  this  unequal  position,  the  law  exacts 
of  the  party  holding  the  position  of  advantage  —  i.e.,  the 
insured  —  the  utmost  good  faith  and  candor  in  communi- 
cating the  facts  affecting  the  risk." 

Again,  Mr.  Hine,  in  his  ''Book  of  Instruction,"  says: 


NATURE  OF  CONTRACTS  167 

''In  no  contract  is  one  party  more  completely  at  the 
mercy  of  another  than  the  underwriter,  i.e.,  the  company, 
in  insurance.  He  is  necessarily  ignorant  of  facts  and  cir- 
'cumstances  that  may  be  vital  to  the  risk  and  hence  open 
to  the  fraud  of  designing  men,  who  may  withhold  or  mis- 
represent 'material'  facts." 

Some  mention  has  already  been  made  of  the  significant 
features  of  the  earliest  insurance  contracts,  or  policies,  as 
they  began  to  be  called  somewhere  about  1700,  and  did 
space  permit,  the  history  of  the  development  of  the  fire 
insurance  contract  and  its  attendant  clauses  would  well 
repay  investigation  and  is  recommended  as  an  interesting 
and  highly  instructive  topic  for  independent  work  for  any 
who  may  care  to  pursue  their  studies.  The  present  dis- 
cussion, however,  must  be  limited  for  the  most  part  to 
contracts  now  in  general  use,  and  the  history  of  the  develop- 
ment which  leads  up  to  them  cannot  even  be  briefly  indi- 
cated here  beyond  the  statement  that  the  simple  and  brief 
policies  used  in  the  early  days  of  insurance  liistory  have 
expanded  into  the  lengthy  and  complex  documents  now 
in  general  use  by  gradual  process  of  development,  the 
numerous  changes  embodying  the  results  of  the  experience 
of  the  intervening  years.  Each  new  clause  or  provision 
has  a  history. 

While  most  of  the  policies  issued  during  the  early  years 
of  the  nineteenth  century  were  similar,  yet  divergencies 
arose  at  a  comparatively  early  date  owing  to  changes  and 
additions  which  resulted  from  the  varying  experiences  and 
theories  of  different  underwriters.  These  differences  were 
increased  by  the  efforts  of  those  companies  who  strove  to 
gain  favor  by  attractive  forms  of  contracts,  also  by  those 
who  endeavored,  by  cunningly  worded  and  over-stringent 
forms,  to  prepare  pretexts  by  which  the  payment  of  losses 
claimed  might  be  avoided.  This  latter  practice  has  even 
to  this  day  characterized  many  contracts  made  attractive 
at  first  sight  by  Iheir  low  prices.  The  swindler  in  fire 
insurance,   as  in   other    lines  of    business,  endeavors   to 


168  YALE  READINGS  IN   INSURANCE 

market  worthless  wares  by  quoting  prices  below  those 
at  which  valuable  and  reliable  articles  can  be  secured. 
Since  it  usually  happens  that  more  than  one  company 
carries  insurance  on  the  same  property,  the  difference  in 
forms  of  contracts  above  referred  to  often  produced  dis- 
pute and  confusion  when  claims  arose  under  them.  Until 
1867,  however,  no  great  degree  of  uniformity  was  at- 
tempted. The  various  insurance  centers,  such  as  Boston, 
Hartford,  New  York,  Philadelphia,  and  New  Orleans,  each 
had  its  characteristic  form,  some  companies  doing  a  widely 
extended  business  using  various  forms  in  different  parts 
of  the  country. 

In  1867  and  1868  the  National  Board  of  Underwriters, 
an  organization  comprising  most  of  the  leading  fire  insur- 
ance companies  of  the  country,  and  which  has  had  a  very 
important  influence  upon  the  development  of  the  fire 
insurance  business,  devised  and  adopted  a  form  of  contract 
or  policy  designed  to  be  used  universally.  However,  few 
companies  outside  of  the  city  of  New  York  adopted  the 
form  in  its  entirety,  and  the  annoyance  to  which  the  pub- 
lic was  subjected  by  the  varying  kinds  of  contracts,  brought 
about  in  1873,  in  the  State  of  Massachusetts,  a  law  provi- 
ding for  a  standard  form  of  policy,  and  in  1880  the  Massa- 
chusetts standard  policy  was  made  obligatory  upon  all 
companies  operating  in  that  state. 

In  1886  the  State  of  New  York  also  adopted  a  standard 
form  of  policy  which  became  mandatory  January  15,  1887. 
This  policy  was  devised  by  the  superintendent  of  insur- 
ance in  consultation  with  various  eminent  insurance 
officials  and  organizations.  It  was  carefully  prepared 
and  is,  on  the  whole,  while  not  altogether  beyond  criticism, 
the  most  useful  and  satisfactory  fire  insurance  contract  yet 
brought  into  anything  like  general  use.  It  has  been  made 
mandatory  by  seven  other  states,  and  is  commonly  used 
by  all  insurance  companies  doing  a  widely  extended  busi- 
ness throughout  the  United  States  wherever  the  laws  of 
individual  states  do  not  forbid. 


NATURE  OF  CONTRACTS  169 

Other  forms  of  standard  policies  have  been  adopted  by 
the  States  of  Maine,  Massachusetts.  New  Hampshire, 
Michigan,  Missom'i,  Virginia,  and  Wisconsin,  but  are  all 
inferior  to  the  New  York  form,  which  we  will  accordingly 
adopt  as  the  basis  of  our  discussion.  The  standard  policy 
is  a  form  with  the  conditions  and  stipulations  printed  in 
a  certain  size  type,  prescribed  by  law  so  that  it  may  be 
plainly  read.  Everything  is  prescribed  by  law  except  the 
premium,  the  term,  date  and  amount.  A  space  is  left  for 
the  proper  description  of  the  particular  piece  of  property 
to  be  insured. 

The  first  part  of  the  contract  (see  Chapter  VIII),  below 
the  name  of  the  company,  is  the  statement  of  the  considera- 
tion. Policies,  like  most  other  contracts,  are  not  valid 
without  a  valuable  consideration.  The  important  thing  to 
notice  here  is  that  not  only  the  premium  paid,  but  also  the 
printed  stipulations  of  the  policy  are  a  part  of  this  considera- 
tion. Next  follows  the  name  of  the  person  or  corporation  to 
whom  the  contract  is  issued.  Then  the  beginning,  duration, 
and  ending  of  the  period  for  which  the  contract  is  to  run 
are  clearly  stated.  You  will  note  that  the  contracts  begin 
and  end  at  noon.  For  some  reasons  it  would  be  more  con- 
venient to  have  a  later  hour  than  twelve  o'clock,  so  that 
the  policies  might  end  at  the  close  of  a  complete  business 
day.  Whether  the  language  used  means  the  solar  noon,  i.e., 
the  moment  when  the  sun  crosses  the  meridian,  or  twelve 
o'clock  according  to  the  standard  time  at  the  particular 
place  where  the  policy  covers,  is  not  yet  definitely  settled 
by  the  courts.  Next,  the  policy  limits  the  amount  for 
which  the  company  may  be  liable.  Then  comes  a  clause 
limiting  the  application  of  tlie  policy  to  the  property 
described  while  in  the  location  mentioned  in  the  policy 
only.  Needless  to  say,  the  contract  is  made  and  the  rate 
of  premium  fixed  according  to  the  liazard  of  the  location 
of  the  property  when  insured,  hence  the  policy  must  be 
confined  to  that  location,  unkvss  altered  by  a  new  agree- 
ment between  the  parties  to  it.     Next  follows  a  space  for 


170  YALE  READINGS  IN  INSURANCE 

the  description  of  the  property  to  be  insured;  also  for  a 
description  of  its  location  and  for  any  additional  permits, 
stipulations  or  agreements  (such  as  a  permit  allowing 
other  insurance,  or  for  the  use  of  gasoline,  etc.),  which 
may  be  agreed  upon  by  the  company  and  the  policy-holder, 
which  additional  agreements,  however,  must  not  be  in 
conflict  with  the  mandatory  legal  conditions  of  the  policy. 
After  the  description  follows  a  paragraph  w^hich  defines, 
briefly  and  fully,  the  liability  of  the  company  and  the 
method  for  settlement  and  payment  of  losses.  The  first 
few  lines  have  already  been  anticipated,  and  do  not  need 
further  comment.  The  latter  portion  of  the  paragraph 
states  the  options  to  which  the  company  is  entitled;  (a) 
to  pay  to  the  assured  the  duly  ascertained  value  of  the 
property  damaged,  thereby  acquiring  ownership  of  it;  or, 
(6)  to  repair,  rebuild,  or  replace  the  property  destroyed 
or  damaged  with  other  of  like  kind  and  quality  after  the 
loss  or  damage  has  been  duly  proved.  But  the  assured 
is  not  permitted  to  abandon  his  property  to  the  company 
except  at  its  option. 

The  first  option  is  often  useful  in  cases  where  an  exces- 
sive damage  is  claimed  on  articles  whose  value  has  been 
fixed  during  the  settlement.  For  instance;  if  the  assured 
and  the  company  have  agreed  that  the  original  or  sound 
value  of  a  damaged  stock  was  $10,000,  but  cannot  agree 
as  to  the  amount  of  damage  done  by  fire,  w'ater,  or  smoke, 
it  is  of  course  perfectly  fair  for  the  company  to  pay  to  the 
assured  the  agreed  value,  namely  $10,000,  and  then  to 
dispose  of  the  stock  as  best  it  can.  Very  often  by  this 
means  controversy  is  avoided  and  the  claimant  satisfied 
beyond  cavil,  while  the  company  escapes  with  the  loss  of 
a  much  smaller  sum  than  the  claimant  would  have  been 
satisfied  to  accept  without  dispute.  Where  this  com'se 
is  followed  the  damaged  articles  are  usually  cleaned,  re- 
paired, and  put  into  the  best  possible  condition  and  then 
sold.  This  process  is  called  wrecking  and  has  grown  to 
be  a  business  by  itself.     A   number  of  insurance   com- 


NATURE  OF  CONTRACTS  171 

panies  have  organized  a  company  to  do  such  work,  and 
there  are  also  private  concerns  which  conduct  renovating 
estabhshments,  where  damaged  goods  and  wares  of  every 
description  may  be  cleansed,  laundered,  polished,  repaired, 
dyed,  or  put  through  any  other  process  that  will  make  them 
salable,  and  the  salvages  thus  made  are  frequently  sur- 
prisingly large. 

The  second  option  —  that  which  gives  the  company 
the  privilege  of  replacing  —  is  availed  of  by  companies 
in  extreme  cases  only.  Insurance  companies  are  not 
traders  or  contractors.  They  have  no  special  machinery 
or  opportunities  for  advantageous  buying;  in  fact,  are 
likely  to  be  unable  to  purchase  at  as  favorable  terms  as 
the  assured. 

Nor  if  a  building  is  to  be  repaired  or  rebuilt  can  the  work 
be  economically  supervised  and  watched  by  an  insurance 
company,  especially  if,  as  is  likely  to  be  the  case,  the  loca- 
tion is  at  a  distance  from  the  head  office  of  the  company. 

Moreover,  the  requirement  that  the  company  shall 
furnish  articles  of  like  kind  and  quality  involves  certain 
risks,  for  it  may  be  necessary  to  prove  that  this  condition 
has  been  satisfied. 

A  noteworthy  case  of  this  kind  occurred  not  many  years 
since  in  Tennessee,  where  the  owner  of  a  hotel  which  had 
been  destroyed  succeeded  in  establishing  what  seemed  to 
the  companies  interested  an  excessively  high  valuation,  — 
so  high,  in  fact,  that  it  was  thought  a  new  building  like 
the  old  one  could  be  erected  for  much  less  than  the  amount 
claimed.  Accordingly,  the  companies  elected  to  rebuild 
instead  of  paying  the  loss,  and  having  called  upon  the 
assured  for  plans  and  specifications,  proceeded  to  make 
contracts  for  the  restoration  of  the  building  exactly  as  it 
was  before  the  fire.  It  was  practically  impossible  for  the 
companies  to  watch  every  detail  of  the  construction,  but 
an  easy  matter  for  the  assured,  who  lived  whei-e  the  build- 
ing was  located.  When  the  building  was  hnished  the  com- 
panies tendered  it  to  the  assured  in  lieu  of  payment,  but 


172  YALE  READINGS  IN  INSURANCE 

he  was  able  to  prove  —  or  at  least  did  prove  to  the  satis- 
faction of  a  jury  —  that  the  building  was  not  of  exactly 
the  same  kind  and  quality  as  the  old  one  which  had  been 
destroyed.  Therefore  he  claimed  the  full  cash  payment, 
and  the  court  decided  that  the  companies  were  liable.  As 
a  result,  the  assured  received  tlie  full  amount  of  his  claim, 
with  interest,  and  since  the  new  building  was  on  his  land, 
he  also  acquired  that.  This  was  a  very  costly  experience 
for  the  companies  and  will  suffice  to  explain  why  the 
option  to  replace  is  seldom  used. 

We  now  come  to  what  are  commonly  called  the  condi- 
tions of  the  policy. 

Paragraph  3  of  the  policy  provides  for  the  forfeiture  of 
the  policy  by  misleading  or  fraudulent  acts  or  by  conceal- 
ment of  material  facts  on  the  part  of  the  assured.  The 
policy  is  based  upon  the  representations  and  statements  of 
the  insured  and  therefore  it  is  but  fair  that  the  company 
should  not  be  bound  in  a  case  where  its  contract  has  been 
secured  by  false  statements,  or  because  of  the  suppression 
or  concealment  of  some  material  fact  affecting  the  hazard. 
Most  of  the  pro\'isions  in  this  paragraph  refer  to  the  nego- 
tiations attending  the  issuance  of  the  policy. 

Paragi-aph  4  renders  a  policy,  which  may  have  been 
valid  during  a  part  of  its  term,  void  in  case,  during  its  life, 
some  act  of  the  assured,  or  within  his  knowledge,  operates 
to  alter  materially  the  conditions  of  the  property  insured 
as  to  hazard  or  ownership.  Since  the  contract  is  a  per- 
sonal one  it  is  obvious  that  a  change  in  ownership  makes 
it  of  no  effect.  Furthermore,  the  contract  was  made  in 
view  of  the  hazards  existing  at  the  time  of  its  issuance  and 
was  determined  in  several  important  respects  by  those 
circumstances,  hence  a  material  increase  of  hazard  cannot 
be  assumed  without  a  rearrangement  of  the  contract  — 
generally  as  to  price,  but  also  often  as  to  the  amount 
which  the  company  is  willing  to  carry.  Some  of  the 
hazards  mentioned  in  this  paragraph,  such  as  vacancy, 
generating  of  gas,  storage  of  fire  works,  etc.,  are  so  danger- 


NATURE  OF  CONTRACTS  173 

ous  that  most  companies  will  not  assume  or  continue 
liability  where  they  exist.  All  of  the  changes  mentioned 
in  this  paragraph  are  considered  to  affect  the  hazards 
involved.  It  will  be  noticed  that  the  saving  clause 
"unless  otherwise  provided  by  agreement  indorsed  hereon 
or  added  hereto"  makes  it  possible  to  alter  an  existing 
contract  so  as  to  permit  any  or  all  of  the  changes  mentioned 
in  the  paragraph  under  consideration,  i.e.,  paragraph  4, 
and  as  a  matter  of  fact  almost  every  policy  does  permit 
one  or  more  of  the  hazards  or  changes  prohibited  in  this 
paragraph. 

Paragraph  5  exempts  the  company  from  liability  on 
account  of  fires  caused  by  war,  riot,  or  public  authority. 
Such  losses  for  the  most  part  can  be  recovered  from  the 
municipality,  and  insurance  would  be  a  double  compensa- 
tion. Moreover,  such  losses  are  by  their  nature  extraor- 
dinary and  unavoidable  under  prevailing  conditions. 
Even  the  apparatus  for  extinguishing  fire,  the  presence 
of  which  may  largely  have  reduced  the  price,  cannot  be 
used. 

Paragraph  5  also  in  part  exempts  the  company  from 
losses  which  may  be  concurrent  with  a  fire  loss,  but  are 
not  losses  by  fire  itself.  If  the  assured  remove  his  goods 
endangered  by  fire  to  a  place  of  safety,  it  is  no  more  the 
province  of  the  insurance  company  to  protect  them  from 
theft  than  before.  Often  companies  do  pay  for  stolen 
articles,  but  only  because  it  cannot  always  be  determined 
whether  these  were  burnt  or  purloined.  So,  too,  when  an 
explosion,  as,  for  instance,  of  a  boiler,  is  followed  by  fire, 
the  company  can  be  held  for  loss  caused  by  fire  only,  and 
must  be  relieved  from  claims  on  account  of  any  damage 
shown  to  have  been  caused  by  the  explosion.  The  clause 
freeing  companies  from  liability  when  an  assured  has  failed 
to  use  reasonable  means  to  save  the  property  is  rarely 
effective.  The  burden  of  proof  is  upon  the  company  in 
such  case,  and  it  is  practically  hnpossible  to  establish 
beyond  a  doubt  that  the  loss  or  damage  was  brought 


174  YALE  READINGS  IN  INSURANCE 

about  by  the  assured's  neglect  to  use  reasonable  means  to 
preserve  and  save  the  property. 

Paragraph  6  provides  that  when  a  building  falls  as  the 
result  of  weakened  foundations,  or  is  overthrown  by  a 
wind  storm,  or  some  other  cause,  the  fire  insurance  cover- 
ing it  instantly  ceases,  for  the  reason  that  such  a  building 
at  once  loses  its  value  and  becomes  a  heap  of  debris.  Fires 
usually  start  in  such  cases  from  some  overthrown  lamp  or 
stove,  but  the  fire  burns  only  the  debris  of  a  building 
already  destroyed,  —  not  the  building  itself. 

The  first  lines  of  paragraph  7  provide  that  certain 
articles,  not  as  a  rule  inherently  valuable,  but  being  the 
evidence  of  value,  shall  not  be  insured.  Money  and 
securities  are  included  in  this  list.  These  articles  afford 
such  opportunities  for  fraud,  can  be  so  easily  concealed, 
and  the  amount  of  them  is  so  impossible  to  determine, 
except  from  the  statement  of  the  insured,  that  to  insure 
them  would  put  the  company  so  absolutely  at  the  mercy 
of  the  claimant  that  companies  have  never  been  willing 
to  assume  liability  on  them. 

The  next  lines  in  the  paragraph  refer  to  articles  concern- 
ing which  there  might  be  some  dispute  as  to  the  application 
of  a  policy  couched  in  general  terms,  or  concerning  the 
value  of  which  a  difference  of  opinion  might  readily  arise, 
and,  in  general,  articles  of  a  class  which  companies  will 
not  willingly  insure  unless  under  exceptional  conditions. 
Hence  it  is  provided  that,  in  order  that  these  be  included 
within  the  scope  of  a  policy,  they  must  be  specifically 
mentioned.  They  are  by  no  means  prohibited  from 
insurance;  in  fact,  they  are  very  commonly  insured. 

The  last  Ihies  are  intended  simply  to  put  the  several 
companies  who  may  happen  to  insure  the  same  building 
under  different  forms  of  contracts  on  an  equality  as  to 
certain  very  perishable  items. 

Paragraph  8  merely  emphasizes  what  is  said  in  para- 
graph 3  as  to  certain  written  statements  made  by  the  as- 
sured, or  assented  to  by  him  prior  to  the  issuance  of  policy. 


NATURE  OF  CONTRACTS  175 

Paragraph  9  is  inserted  for  the  protection  of  the  com- 
panies, because,  under  the  common  law,  an  insurance 
contract  may  be  affected  or  altered  by  verbal  agreement, 
and  because  many  of  the  details  between  agents  and  in- 
surers must  be  handled  by  clerks.  A  clerk  or  a  middle- 
man may  deliver  a  policy,  collect  the  premium  for  the 
agent  of  the  company,  or  even  take  an  order  for  him,  but 
cannot  act  as  authoritative  agent  of  the  company  unless 
so  empowered  by  the  company  in  writing.  Many  times 
claims  for  special  terms,  privileges,  etc.,  are  based  on 
alleged  verbal  promises  of  clerks  or  middlemen. 

Paragraph  10  simply  enforces  the  conditions  embraced 
in  paragraphs  3  and  4  as  to  a  policy  renewed.  In  other 
words,  it  renews  the  obligation  of  the  assured,  as  well  as 
that  of  the  company. 

Paragi-aph  11  permits  either  party  to  the  contract  to 
terminate  it.  In  case  the  company  so  elects,  the  assured 
is  allowed  five  days  in  which  to  secm-e  other  insurance. 
When  the  assured  chooses  to  cancel,  the  company  is  per- 
mitted to  retain  more  than  the  proportional  fractional 
part  of  the  original  premium;  that  is,  in  case  of  a  one  year 
policy  canceled  at  six  months  by  the  assured,  the  company 
is  allowed  to  retain  slightly  more  than  one-half  of  the 
premium.  This  is  because  the  company  is  compelled 
to  expend  a  considerable  part  of  every  premium  received 
in  handling  the  record  of  the  contract  so  as  to  comply  with 
the  law,  and  in  other  ways  to  consume  at  the  outset  a  part 
of  each  premium  in  fixed  charges.  If  it  is  terminated 
prior  to  maturity  by  the  assured,  the  law  holds  the  com- 
pany to  be  entitled  fairly  to  recover  those  fixed  charges. 
If  the  company  chooses  to  cancel,  however,  these  charges 
are  lost,  and  the  assured  receives  full  return  premium 
according  to  the  time  which  the  policy  has  run.  Hence, 
contracts  are  seldom  terminated  by  companies  without 
good  cause. 

Paragraph  12  refers  exclusively  to  mortgage  interests, 
and  provides  that,  as  to  such  interest,  companies  may  alter 


176  YALE  READINGS  IN  INSURANCE 

the  policy  conditions  as  they  see  fit.  There  is  some  plausi- 
ble reason  for  this,  since  mortgages  based  upon  the  value 
of  destructible  property  must  be  protected,  and  it  is  also 
necessary  that  such  protection  shall  not  be  jeopardized 
by  some  improper  action  of  the  borrower,  i.e.,  the  property 
owner. 

Paragraph  13  simply  provides  that  the  efforts  of  the 
assured  to  save  his  property  from  destruction  by  removing 
it  from  danger  shall  not  result  to  his  harm.  Ordinarily  a 
removal  without  the  consent  of  the  company  vitiates  the 
policy  and  this  paragraph  simply  makes  an  exception  to 
this  rule. 

Paragraph  14  states  very  clearly  the  duties  of  the  assured 
if  fire  occurs,  and  provides,  first,  —  that  he  shall  give  the 
company  due  notice  of  its  occm'rence. 

Second,  —  that  he  shall  protect  the  property  saved, 
whether  damaged  or  undamaged,  —  at  the  same  time 
making  an  inventory  of  the  same,  with  complete  statement 
of  quantities,  values,  and  amount  of  claimed  damages. 
And, 

Third,  —  that  he  shall,  within  sixty  days,  render  a  com- 
plete statement,  under  oath,  giving  in  detail  a  full  account 
of  the  fire  and  a  description  of  the  property  involved,  and 
of  the  facts  concerning  its  ownership,  in  accordance  with 
the  list  to  be  found  in  the  paragraph  under  discussion. 

The  next  paragraph  gives  to  the  company  the  oppor- 
tunity to  inspect  all  that  remains  of  the  property,  to  cross- 
examine  the  assured  as  to  claims  and  statements  made, 
and  to  verify  same  by  an  examination  of  the  books  and 
records  of  the  assured. 

It  will  be  seen  that  these  provisions  and  requirements 
contemplate  the  making  of  a  complete  proof  or  statement 
by  the  claimant,  which  the  company  may  thereupon  verify, 
test,  and  pass  upon,  and,  if  the  proofs  set  forth  a  claim 
which  is  satisfactory  and  correct  under  the  terms  and  scope 
of  the  contract,  it  is  to  be  presumed  the  company  will, 
at  the  proper  time,  pay  it. 


NATURE  OF  CONTRACTS  177 

Paragraph  18  is  very  important.  It  provides  for  the 
distribution  of  loss  among  the  various  companies  insuring 
identical  property,  according  to  the  amount  which  each 
company  carries.  For  instance,  if  there  is  $20,000  total 
insurance  actually  in  force  on  any  piece  of  property  and 
one  company  carries  $5000  of  this  amount,  that  company 
must  pay  and  must  pay  only  one-quarter  of  any  loss 
occurring  to  the  property  up  to  the  amount  for  which  it  is 
liable;  and  this  condition  is  valid  even  if  one  or  more  of 
the  other  companies  carrying  the  same  risk  are  unable 
to  satisfy  the  claims  against  them,  for  the  amount  of 
insurance  legally  in  force  determines  the  amount  of  various 
liabilities  and  claims.  The  collection  of  those  claims  is  a 
subsequent  operation. 

The  paragraph  permits  special  agreements  between 
assured  and  companies  as  to  how  policies  shall  apply. 
There  are  several  of  these  agreements  in  common  use, 
which  will  be  described  later  in  this  lecture. 

The  last  lines  only  apply  where  one  insurance  company 
assumes  a  portion  of  the  liability  of  another  company,  and 
permit  such  contracts  between  companies  to  be  arranged 
according  to  the  desires  of  the  two  companies.  This 
standard  form  of  policy  is  intended  to  secure  fair  and 
proper  conditions  between  companies  and  property  owners, 
and  such  contracts  between  companies  as  reinsurances, 
so-called,  are  hardly  within  its  purview. 

Paragraph  19  is  intended,  first,  to  prevent  double  com- 
pensation; that  is,  a  profit  to  the  insured,  from  a  fire; 
second,  to  compel  those  through  whose  act  or  neglect  the 
loss  occurred  to  make  good  the  loss  they  have  caused. 
Public  policy  as  well  as  equity  demands  this.  It  is  mani- 
fest that  I  should  not  be  made  free  of  financial  responsi- 
bility for  my  criminal  or  careless  act  simply  because  the 
person  I  have  injured  is  insured.  In  such  cases  companies 
commonly  pay  the  loss  and  then  endeavor  to  collect  from 
the  person  or  corporation  responsible  for  the  occurrence 
of  the  loss,  the  amount  so  paid. 


178  YALE  READINGS  IN   INSURANCE 

Paragraph  20  is  a  statute  of  limitation  to  guard  against 
wilful  and  vexatious  delays  in  making  claims. 

Paragraph  21  is  merely  explanatory. 

Paragraph  22  is  intended  for  mutual  companies  only, 
and  in  effect  makes  the  articles  of  association  of  such  com- 
panies a  part  of  the  policy. 

The  remaining  paragraph  of  the  policy  recites  that  no 
conditions  of  the  policy  may  be  altered  except  those  whose 
language  provides  for  modification,  and  that  no  permissible 
alteration  may  be  made  except  by  written  endorsement  on 
the  policy.  It  will  be  seen  that  the  whole  purpose  of  the 
contract  is  to  define  the  rights  of  the  two  parties  interested 
so  clearly  and  fairly  that  disputes  may  be  avoided  and  in- 
justice or  improper  claims  prevented.  Despite  the  care 
exercised  by  its  framers  to  this  end,  however,  there  is 
hardly  a  clause  in  the  standard  form  which  has  not  been 
referred  to  some  court  for  authoritative  interpretation, 
and  a  mass  of  legal  decisions  have  accumulated  which  in 
reality  are  collateral  to  the  contract  and  might  even  with 
propriety  be  deemed  a  part  of  it.  With  these  decisions, 
curious  and  interesting  as  many  of  them  are,  we  shall  not 
concern  ourselves  here,  the  broad  outlines  of  the  contract 
being  sufficient  for  our  purpose. 

Despite  the  apparently  stringent  conditions  and  techni- 
cal exceptions  contained  in  this  contract,  and  although 
these  conditions  and  exceptions  are  sometimes  made  the 
basis  of  improper  attempts  to  avoid  payment  of  losses  by 
unscrupulous  companies,  there  can  be  no  doubt  that  on 
the  whole  and  in  by  far  the  greater  number  of  cases,  in 
fact  almost  universally,  the  assured  secures  absolute 
justice,  and  more,  from  the  operation  of  this  form  of  con- 
tract. A  very  liberal  estimate  of  the  amount  of  litigation 
under  fire  insurance  policies  indicates  that  not  over  one- 
half  of  1  per  cent,  of  claims  result  in  law  suits.  When  it 
is  remembered  that  these  claims  are,  in  90  per  cent,  of  the 
cases  occurring,  for  partial  damage  to  property,  concerning 
which  there  is  legitimate  o[)portunity  for  an  honest  dif- 


NATURE  OF  CONTRACTS  179 

ference  of  opinion,  and  in  view  of  the  fact  that  the  vaHdity, 
as  well  as  the  amount  of  all  claims  must  be  established 
before  payment,  the  amount  of  ensuing  litigations  is  seen 
to  be  absolutely  inconsiderable.  Not  so  in  effect,  how- 
ever, for  such  is  human  nature  that  one  resisted  claim 
overbalances  in  public  estimation  a  hundred  which  have 
been  settled  not  only  without  friction,  but  even  with 
liberality. 

As  w^e  have  seen,  there  are  various  portions  of  the  policy 
which  may  be  modified  by  special  wTitten  agreements  with 
the  assured,  called  endorsements.  Any  of  the  numerous 
prohibitive  clauses  in  paragraph  4  may  be  waived  in  this 
way.  So  also  with  the  excepted  articles  noted  in  para- 
graph 5.  The  most  important  alterations  in  the  contract, 
however,  and  those  most  generally  in  use  are  the  ones 
which  refer  to  interests  of  mortgagees  and  those  which, 
as  per  paragraph  18,  concern  the  extent  of  the  api^lication 
of  the  policy  or  its  measure  of  contribution.  The  policy 
provides  that,  as  to  the  creditor's  interest,  the  contract 
shall  apply  as  may  be  expressed  in  the  written  clause 
referring  thereto.  The  ordinary  way  of  recognizing  a 
mortgagee's  or  creditor's  interest  is  to  issue  the  policy 
to  the  owner  and  then  endorse  upon  it  ''loss,  if  any,  under 
this  policy  payable  to  John  Smith,  mortgagee,  as  his 
interest  may  appear."  When  a  loss  occurs  under  a  policy 
with  this  clause  the  amount  of  it  is  settled  with  the  owner, 
but  payment  must  be  first  made  to  the  payee,  i.e.,  the 
mortgagee,  until  his  interest  is  satisfied,  or  unless  he  con- 
sents to  allow  payment  to  the  owner,  as  he  usually  will 
do  when  the  loss  is  small.  Since,  however,  many  loaners 
need  and  demand  absolute  security,  it  is  a  very  common 
practice  to  attach  a  printed  mortgage  clause  which  reads 
as  follows: 

"Loss  or  damage,  if  any,  under  this  policy,  shall  be  pay- 
able to as mortgagee  [or  trus- 
tee], as  interest  may  appear,  and  this  insurance,  as  to  the 
interest  of  the  mortgagee  [or  trustee]  only  therein,  shall 


180  YALE  READINGS  IN  INSURANCE 

not  be  invalidated  by  any  act  or  neglect  of  the  mortgagor 
or  owner  of  the  within  described  property,  nor  by  any 
foreclosure  or  other  proceedings  or  notice  of  sale  relating 
to  the  property,  nor  by  any  change  in  the  title  or  ownership 
of  the  property,  nor  by  the  occupation  of  the  premises  for 
purposes  more  hazardous  than  are  permitted  by  this 
policy;  Provided,  that  in  case  the  mortgagor  or  owner 
shall  neglect  to  pay  any  premium  due  under  this  policy, 
the  mortgagee  [or  trustee]  shall,  on  demand,  pay  the 
same. 

"Provided  also,  that  the  mortgagee  [or  trustee]  shall 
notify  this  company  of  any  change  of  ownership  or  occu- 
pancy or  increase  of  hazard  which  shall  come  to  the  knowl- 
edge of  said  mortgagee  [or  trustee]  and,  unless  permitted 
by  this  policy,  it  shall  be  noted  thereon  and  the  mortgagee 
[or  trustee]  shall,  on  demand,  pay  the  premium  for  such 
increased  hazard  for  the  term  of  the  use  thereof;  otherwise 
this  policy  shall  be  null  and  void." 

This  clause  practically  waives  all  rights  of  the  insurance 
company  as  far  as  the  payee  is  concerned.  He  may  collect 
his  due,  even  if  it  can  be  proven  that  the  owner,  that  is, 
the  assured,  has  fired  the  property  himself,  or  if  he  has 
violated  every  condition  of  the  policy.  The  only  protec- 
tion for  the  insurance  company  in  those  cases  where  the 
policy  itself  has  been  made  void,  but  where  nevertheless 
payment  must  be  made  to  the  creditor,  is  a  provision 
that  the  claim  of  the  creditor  becomes  the  property  of  the 
insurance  company  and  may  be  enforced  by  it  against  the 
debtor  if  collectible.  This  right  of  subrogation,  as  it  is 
called,  is  frequently  taken  advantage  of  by  companies 
and  in  some  instances  enables  them  to  recover  a  loss  which 
they  have  paid  under  such  conditions.  The  mortgage 
clause  also  imposes  certain  responsibilities  upon  the  mort- 
gagee in  case  violations  of  policy  conditions  occur  with 
his  knowledge. 

The  clauses  referring  to  the  extent  of  the  application  or 
contribution  of  the  policy  are  more  difficult  to  explain 


NATURE  OF  CONTRACTS  181 

briefly  or  to  be  comprehended  readily.  Before  discussing 
those  clauses  at  all,  it  may  be  helpful  to  make  a  few  pre- 
liminary observations. 

Wliere  there  is  little  or  no  protection  against  fire,  that 
is,  no  local  means  of  extinguishing  fires,  as  in  the  case  of 
village  stores  or  shops,  or  where,  for  any  other  reason,  the 
property  to  be  insured  is  thought  to  be  subject  to  great 
or  total  loss  should  a  fire  once  start,  the  interest  of  the 
insurance  companies  leads  them  to  limit  the  amount  of 
insurance  (as  compared  with  the  value  of  the  property 
insured)  which  may  be  carried  or  recovered  in  event  of  loss. 
This  is  done  in  order  that  the  interest  of  the  owner  in  pre- 
serving the  property  may  be  so  strong  that  the  utmost 
watchfulness  and  careful  attention  will  be  observed  by 
him.  It  is  evident  if,  in  the  event  of  fire,  he  is  likely  to 
suffer  a  severe  loss  over  and  above  his  insurance,  he  will 
have  a  much  stronger  incentive  to  guard  his  property  from 
fire  than  if  it  were  insured  for  its  full  value.  For  a  similar 
purpose  companies  find  it  necessary  to  limit  the  percentage 
of  insurance  to  be  carried  in  certain  states  or  districts 
where  conspicuous  or  abnormally  heavy  burning  ratios 
indicate  unusual  carelessness,  unsatisfactory  protection, 
or  dangerous  methods  of  construction.  In  other  words, 
the  greater  the  danger  of  total  loss  the  stronger  pecuniary 
interest  the  owner  should  have  in  the  preservation  of  his 
property.  On  the  other  hand,  where  there  is  efficient  fire 
protection,  as  in  most  large  cities,  or  where  a  policy  covers 
in  several  distinct  locations,  or  on  property  which  is  not 
readily  susceptible  to  damage,  as  for  instance,  bar  iron, 
there  is  a  reasonable  prospect  that  fires  will  be  extinguished 
before  a  large  portion  of  the  property  involved  is  de- 
stroyed. In  such  cases,  therefore,  insurance  companies 
naturally  desire  tliat  a  large  proportion  of  the  value  should 
be  covered  by  insurance  in  order  that  a  moderate  loss  of 
property  shall  cause  only  a  moderate  loss  to  the  insuranc(3 
company.  In  the  unprotected  village  any  loss  is  likely  to 
be  a  total  one.    In  the  protected  city  almost  all  losses  are 


182  YALE  READINGS  IN   INSURANCE 

partial,  and  insurance  companies  try  to  adapt  their  methods 
to  the  varying  conditions. 

Wliere  it  is  desired  to  limit  the  amount  of  insurance,  the 
New  York  law  permits  the  use  of  the  clause  known  as  the 
"percentage  value  clause."  This  prevents  the  assured  from 
recovering  more  than  a  certain,  usually  75  per  cent,  of  the 
value  of  the  property  insured.  If  by  mistake  he  has  been 
carrying  insurance  exceeding  that  amount,  he  is  entitled 
to  a  return  of  the  premium  paid  on  the  excess  over  the 
percentage  which  the  clause  fixes  as  a  limit  to  recovery. 

However,  by  far  the  greater  amount  of  insurable  property 
is  located  under  more  or  less  efficient  fire  protection  and 
consequently  the  limitation  clauses  are  not  used,  but  in- 
stead, where  possible  —  for  in  some  states  the  law  stands 
in  the  way  —  what  is  commonly  known  as  the  co-insurance 
clause  is  used,  which  reads: 

"It  is  a  part  of  the  consideration  of  this  policy,  and  the 
basis  upon  which  the  rate  of  premium  is  fixed,  that  the 
assured  shall  maintain  insurance  on  each  item  of  property 
insured  by  this  policy,  of  not  less  than  80  per  cent,  of  the 
actual  cash  value  thereof,  and  that,  failing  so  to  do,  the 
assured  shall  be  an  insurer  to  the  extent  of  such  deficit, 
and  in  that  event  shall  bear  his,  her,  or  their  proportion 
of  any  loss." 

It  provides  in  the  words  of  Mr.  F.  C.  Moore,  "that 
whatever  percentage  of  the  property  is  destroyed  —  one- 
c^uarter,  one-half,  or  three-quarters,  as  the  case  may  be  — 
that  percentage  of  the  insurance  is  payable";  or,  as  Mr.  E. 
F.  Beddall  states  the  case,  "it  (the  clause)  leaves  the 
insured  free  to  carry  as  much  or  as  little  insurance  as  he 
deems  needful,  but  it  fixes  the  proportion  of  the  loss  re- 
coverable from  the  company  in  the  event  of  fire,  to  such 
as  the  assured  has  chosen  to  pay  for.  If  he  insures  for 
one-half  of  the  value  he  recovers  one-half  of  the  loss,  be 
it  partial  or  total;  if  the  whole  of  the  value,  the  whole  of 
the  loss.     There  is,  there  can  be,  no  inequity  in  this." 

Still  another  statement  of  its  effect  may  be  made  as 


NATURE  OF  CONTRACTS  183 

follows:  In  order  that  the  assured  may  secure  indemnity 
for  the  whole  of  any  large  or  small  loss  he  may  sustain,  he 
must  carry  insurance  equal  to  the  full  value  of  the  property 
involved.  Usually  a  percentage  co-insurance  clause  is 
used,  which  makes  some  given  per  cent,  of  the  value  of  the 
property,  ordinarily  80  per  cent.,  the  amount  which  the 
insured  must  carry  in  order  to  secure  in  all  cases  full 
benefit  of  his  insurance.  Failing  so  to  do,  he  can  recover 
only  such  proportion  of  any  loss  amounting  to  less  than 
80  per  cent,  of  the  value  of  the  property  insured,  as  the 
amount  of  insurance  he  actually  carries  bears  to  80  per 
cent,  of  the  value.  Thus,  if  the  value  is  S10,000  and  the 
insurance  $5000,  he  can  recover  but  five-eighths  of  any 
loss  which  amounts  to  less  than  $8000;  that  is,  of  any  loss 
which  amounts  to  less  than  80  per  cent,  of  the  $10,000. 
When,  however,  the  assured  carries  insurance  equal  to 
80  per  cent,  of  the  value  of  the  property  covered,  the  80 
per  cent,  co-insurance  clause  is  of  no  effect.  The  assured 
in  such  cases  will  receive  the  entire  amount  of  his  loss,  be 
it  large  or  small,  not  exceeding,  of  course,  the  amount  of 
the  policy.  This  should  be  carefully  noted,  for  many 
people  labor  under  the  impression  that  where  such  a  clause 
is  used  only  80  per  cent,  of  any  loss  can  be  collected. 

The  co-insurance  clause  is  even  more  important  as  a 
factor  in  the  problem  of  making  rates  or  prices,  as  we  shall 
see  when  discussing  that  subject.  Where  this  clause  is 
used  in  a  policy  a  reduction  in  price  is  made  as  compared 
with  policies  covering  similar  property  similarly  located, 
but  without  the  co-insurance  clause.  In  fact,  this  clause 
is  often  called  the  reduced  rate  clause  in  states  where  the 
law  has  not  given  it  a  name. 

In  some  parts  of  the  country,  for  instance  Indian  Terri- 
tory, Texas,  and  Arkansas,  where  fires  have  occurred  with 
abnormal  frecjuency,  and  particularly  on  certain  classes 
in  those  sections,  such  as  cotton-gins,  which  are  extremely 
liable  to  fire  on  account  of  the  inflammable  nature  of  the 
cotton  and  the  process  to  which  it  is  subjected,  the  per- 


184  YALE  READINGS  IN  INSURANCE 

centage  value  clause  is  sometimes  replaced  by  what  is 
known  as  the  "three-quarters  loss  clause,"  which  reads 
as  follows: 

"It  is  understood  and  agreed  to  be  a  condition  of  this 
insurance,  that  in  the  event  of  loss  or  damage  by  fire  to 
the  property  insured  under  this  policy,  this  company 
shall  not  be  liable  for  an  amount  greater  than  three-fourths 
of  the  actual  cash  value  of  each  item  of  property  insured 
by  this  policy  (not  exceeding  the  amount  insured  on  each 
such  item)  at  the  time  immediately  preceding  such  loss  or 
damage,  and  in  the  event  of  additional  insurance  —  if  any 
is  permitted  hereon  —  then  this  company  shall  be  liable 
for  its  proportion  only  of  three-fourths  such  cash  value 
of  each  item  insured  at  the  time  of  the  fire,  not  exceeding 
the  amount  insured  on  each  such  item." 

This  clause  provides  that  the  property  owner  shall  suffer 
one-quarter  of  any  loss,  great  or  small,  which  may  occur 
to  his  property.  This,  of  course,  is  used  for  the  same 
reasons  that  prompt  the  use  of  the  percentage  value 
clause,  but  is  much  more  radical.  And,  as  a  further  pre- 
caution, there  is  embraced  in  policies  covering  mercantile 
and  manufacturing  property  in  states  with  a  bad  fire  his- 
tory, clauses  making  the  policies  void  unless  the  assured 
shall  keep  an  accurate  set  of  books,  take  an  annual  inven- 
tory, and  either  keep  both  books  and  inventory  in  a  fire- 
proof safe,  or  in  a  place  where  they  will  not  be  endangered 
by  fire  in  a  building  where  insurance  covers.  This  clause 
is  known  as  the  "iron-safe  clause,"  of  which  a  copy  is 
as  follows: 

"  The  following  covenant  and  warranty  is  hereby  made 
a  part  of  this  policy: 

"  First.  —  The  assured  will  take  a  complete  itemized 
inventory  of  stock  on  hand  at  least  once  in  each  calendar 
year,  and  unless  such  inventory  has  been  taken  within 
twelve  calendar  months  prior  to  the  date  of  this  policy, 
one  shall  be  taken  in  detail  within  30  days  of  issuance  of 
this  policy,  or  this  policy  shall  be  null  and  void  from  such 


NATURE  OF  CONTRACTS  185 

date,  and  upon  demand  of  the  assured  the  unearned  pre- 
mium from  such  date  shall  be  returned. 

"  Second.  —  The  assured  will  keep  a  set  of  books,  which 
shall  clearly  and  plainly  present  a  complete  record  of 
business  transacted,  including  all  purchases,  sales,  and 
shipments,  both  for  cash  and  credit,  from  date  of  inventory 
as  provided  for  in  first  section  of  this  clause,  and  during 
the  continuance  of  this  policy. 

''  Third.  —  The  assured  will  keep  such  books  and  inven- 
tory, and  also  the  last  preceding  inventory,  if  such  has 
been  taken,  securely  locked  in  a  fire-proof  safe  at  niglit, 
and  at  all  times  wlien  the  building  mentioned  in  this 
policy  is  not  actually  open  for  business;  or,  failing  in  this, 
the  assured  will  keep  such  books  and  inventories  in  some 
place  not  exposed  to  a  fire  which  would  destroy  the  afore- 
said building. 

"  In  the  event  of  failure  to  produce  such  set  of  books  and 
inventories  for  the  inspection  of  this  company,  tliis  policy 
shall  become  null  and  void,  and  such  failure  shall  constitute 
a  perpetual  bar  to  any  recovery  thereon." 

This  clause  is  intended  to  bar  out  from  the  protection 
of  insurance  policies  the  shiftless  and  careless  dealers  and 
manufacturers  who  abound  in  many  of  the  smaller  towns, 
especially  in  the  Southwest.  It  also  insures  a  more  satis- 
factory and  intelligent  loss  settlement,  should  a  loss  occur, 
than  is  possible  in  those  cases  where  the  entire  property 
is  destroyed  and  no  record  of  quantities  or  of  transactions 
is  preserved. 

Still  another  clause  used  to  govern  the  application  of  the 
policy  is  one  known  as  the  distribution  average  clause, 
which  reads: 

"  It  is  understood  and  agreed  that  the  amount  insured  by 
this  policy  shall  attach  in  each  of  the  above-named  prem- 
ises in  that  proportion  of  the  amount  hereby  insured  that 
the  value  of  property  covered  by  this  policy  contained 
in  each  of  said  places  shall  bear  to  the  value  of  such  prop- 
erty contained  in  all  of  above-named  premises." 


186  YALE  READINGS  IN  INSURANCE 

This  clause  provides  that  the  amount  of  insurance  shall 
attach  in  each  of  two  or  more  locations  according  to  the 
value  in  each.  For  instance,  a  merchant  may  have  his 
merchandise  in  three  locations  —  in  his  store  where  it  is 
to  be  sold;  in  his  warehouse,  where  he  keeps  a  surplus 
stock,  and  in  the  freight  depot  of  the  railway  or  steamship 
line  by  which  he  receives  it.  As  business  progresses  his 
merchandise  is  constantly  shifted.  One  day  two-thirds 
will  be  in  his  store;  on  another  day  one-half  in  his  ware- 
house; on  still  other  days  he  may  have  none  at  all  in  the 
freight  depot.  If  he  insures  his  stock  under  a  policy  with 
the  distribution  average  clause,  the  policy  will  automati- 
cally divide  itself  as  the  stock  is  divided  from  day  to 
day.  If  one-third  of  the  value  is  in  the  warehouse  so  will 
one-third  of  the  policy  cover  there.  If  the  warehouse  is 
empty  the  policy  will  apply  only  in  the  store  and  freight- 
house.  And  also  that  part  of  the  policy  which  covers 
at  each  location  will  be  equal  to  the  fraction  of  the  total 
value  of  the  property  at  each  location. 

Various  other  clauses  are  used  by  companies  to  further 
the  convenience  of  different  patrons,  or  to  provide  against 
the  contingencies  which  arise  in  different  parts  of  the  coun- 
try, but  the  foregoing  are  the  principal  clauses,  the  others 
being  more  seldom  used. 

Policies  are  said  to  be  specific  when  they  cover  on  one 
kind  of  property  or  in  one  definite  location;  floating  when 
they  cover  under  one  division  property  located  at  a  num- 
ber of  different  locations;  general  when  they  cover  several 
kinds  of  property  under  different  items  at  one  location; 
concurrent  when  they  agree  exactly  as  to  their  wording 
and  as  to  the  kind  of  property  covered;  perpetual  when 
their  duration  is  without  limit,  except  by  cancelation. 

These  perpetual  policies  originated  in  Philadelphia, 
where  they  are  chiefly,  if  not  solely,  used.  It  will  be 
remembered  that  one  of  the  earliest  companies  issued  poli- 
cies for  seven  years  in  consideration  of  a  deposit  by  the 
assured,  and  that  the  deposit  was  to  be  returned  to  the 


NATURE  OF  CONTRACTS  187 

assured  at  the  expiration  of  the  policy.  It  was  a  very 
natural  process  to  agree  with  the  assured  to  retain  this 
deposit  indefinitely,  thus  extending  the  term  of  the  insur- 
ance and  making  it  perpetual. 

As  we  have  seen  heretofore,  eight  other  states  have 
prescribed  the  New  York  standard  policy,  and  again,  seven 
states  have  adopted  standard  policy  forms  of  their  own, 
each  differing  from  the  other  and  all  from  the  New  York 
form.  It  follows  that  every  company  which  does  a  widely 
extended  business  must  keep  in  stock  at  least  eight  different 
kinds  of  policies.  Moreover,  since  some  of  the  states  per- 
mit any  form  of  endorsement  clause  which  does  not  conflict 
with  the  policy  in  use  in  that  state,  while  others,  like  New 
York,  permit  only  clauses  which  have  been  specifically 
authorized  by  law  or  passed  upon  by  the  insurance  official 
of  the  state,  it  will  be  seen  that  companies  are  compelled 
to  have  and  use  a  very  great  number  of  different  clauses. 
In  fact,  it  requires  a  very  considerable  amount  of  study 
and  a  good  memory  for  any  one  person  to  be  able  to  keep 
in  touch  with  the  widely  differing  state  requirements  as  to 
policy  forms  and  their  attendant  clauses.  Such  unneces- 
sarily and  often  injuriously  divergent  laws  entail  great 
expense  and  labor  on  the  companies,  and  neither  they  nor 
the  insuring  public  benefit  therefrom.  It  cannot  be 
doubted  that  one  simple  form  of  policy  and  one  set  of 
appropriate  clauses  would  be  better  for  all  concerned. 


CHAPTER  X 

THE   CO-INSURANCE   CLAUSE 

It  has  always  been  a  condition  of  marine  insurance,  as 
it  should  always  have  been  a  condition  of  fire  insurance, 
that  the  principle  of  average  or  co-insurance  should  apply 
in  determining  the  amount  to  be  paid  in  case  of  loss.  It 
would  be  as  unjust  to  insure  the  properties  of  two  owners 
at  the  same  rate,  the  one  insuring  for  50  per  cent,  and  the 
other  for  100  per  cent.,  as  to  assess  the  values  of  their 
properties  for  the  purposes  of  municipal  or  state  taxation 
on  different  percentages  of  value. 

The  old  French  co-insurance  clause  read  as  follows: 

''If,  at  the  time  of  the  fire,  the  value  of  the  objects 
covered  by  the  policy  is  found  to  exceed  the  sum  total 
of  the  insurance,  the  assured  is  considered  as  having 
remained  his  own  insurer  for  that  excess,  and  he  is  to  bear, 
in  that  character,  his  proportion  of  the  loss." 

The  German  clause  was  as  follows: 

''If,  in  case  of  loss,  the  insured  objects  should  exceed 
the  sum  insured,  and  they  should  be  partly  saved,  the 
assured  will  be  considered  as  self-insurer  for  the  excess, 
and  is  to  bear  his  share  of  the  loss  pro  rata." 

These  two  clauses  met  the  issue  squarely  and  left  no 
room  for  mistake  as  to  what  was  intended;  but  after  the 
slipshod  American  methods  of  nearly  a  century  of  insur- 
ance it  is  doubtful  if  the  use  of  these  clauses,  which  were 

'  By  Francis  C.  Moore.  Reprinted  from  pages  573-580  of  "Fire 
and  Insurance  and  How  to  Build;"  The  Baker  and  Taylor  Company. 
New  York,  1903. 

188 


THE  CO-INSURANCE  CLAUSE  189 

perfectly  proper  and  straightforward,  would  be  accepted 
without  the  criticism  of  placing  a  portion  of  the  burden 
of  insurance  upon  the  policy-holder,  overlooking  the  fact 
that  if  his  rate  is  graded  according  to  the  amount  that  he 
carries,  there  is  no  more  reason  why  he  should  complain 
than  in  the  case  of  goods  purchased  at  retail  as  compared 
with  wholesale  prices. 

The  following  is  the  form  of  the  co-insurance  clause  of 
New  York  State. 

"This  company  shall  not  be  liable  for  a  greater  proportion 
of  any  loss  or  damage  to  the  property  described  herein 
than  the  sum  hereby  insured  bears  to  .  .  .  per  cent. 
(.  .  .  per  cent.)  of  the  actual  cash  value  of  said  property 
at  the  time  such  loss  shall  happen. 

"If  the  insurance  under  this  policy  be  divided  into  two 
or  more  items  this  clause  shall  apply  to  each  item  sepa- 
rately." 

The  following  is  a  clever  illustration  of  the  fairness  of 
co-insurance : 

To  write  a  blanket  policy  upon  large  manufacturing 
plants  which  are  composed  of  divers  risks  without  the 
co-insurance  clause  is  the  equivalent  of  assessing  a  tax  on 
your  largest  buildings  at  30  per  cent,  of  their  value,  while 
all  other  property  in  the  city  is  assessed  at  60  per  cent. 
This  discrimination,  if  made  by  your  tax  assessor,  would 
be  promptly  corrected  by  the  board  of  equalization;  and 
yet  by  a  singular  paradox,  legislators,  who  are  insisting 
upon  an  equitable  and  equal  assessment  and  collection  of 
the  fire  tax,  have  attempted  in  some  states  to  force  us 
to  tax  the  poor  man  at  double  the  rate  that  we  tax  the 
rich  corporation.  To  show  you  how  necessai'y  it  is  to 
collect  a  tax  based  upon  about  approximately  80  per  cent, 
of  the  value  of  the  properties,  I  will  use  an  illustration 
which  the  insurance  gentlemen  present  will  understand, 
and  which  I  hope  will  be  perfectly  clear  to  the  laymen 
present. 

Take  1000  detached  frame  dwellings  woi-th  $1200  each, 


190  YALE  READINGS  IN  INSURANCE 

and  insured  at  $1000  each.  The  premiums  at  1  per  cent, 
would  be  $10,000.  Experience  in  this  South  Texas  field 
demonstrates  that  the  loss  would  be  approximately  $6000, 
or  60  per  cent,  of  the  premiums.  Going  further  into 
detail,  the  underwriter  who  is  making  the  rates  finds  that 
at  least  60  per  cent,  of  this  total  amount  comes  from 
trifling  losses  that  range  from  $1.00  to  $150;  that  there 
will  be  two  or  three  losses  where  the  damage  will  be  prac- 
tically 50  per  cent.,  or  $500  each,  and  two  losses  where  we 
will  say  the  losses  are  total,  $1000  each.  We  then  have 
the  figures: 

2  total  losses  of  $1000  each      $2000 

2  losses  of  50  per  cent.,  $500  each 1000 

50  losses  in  small  amounts  from  $1  to  $150 3000 

Now  then  let  us  suppose  that  some  underwriter  new  to 
the  business  has  entered  the  field,  and  has  an  opportunity 
to  scoop  these  1000  good  detached  dwellings.  The  owner 
has  found  out  that  most  of  his  losses  are  small,  and  he 
concludes  to  take  a  small  amount  of  insurance  and  no 
co-insurance.  The  tyro  in  the  business  takes  $500  insur- 
ance on  each  one  of  these  1000  dwellings  at  the  same  rate, 
1  per  cent.,  which  would  make  his  premium  $5000.  The 
losses  are  the  same  as  before.  Let  us  see  where  each  one 
of  the  underwi'iters  will  find  himself.  The  figures  in  the 
last  case  would  be  as  follows: 

2  total  losses,  $500     $1000 

2  damage  losses  of  $500  each  (but  as  the  policies  are 
for  only  $500  each  there  are  two  total  losses  to  the 

company  under  these  policies 1000 

50  losses  same  as  in  first  example,  being  for  small 
amounts     3000 

Total  losses  paid $5000 

The  result  of  this  brilliant  feat  of  underwriting,  in  which 
the  underwriter  insures  only  one-half  the  value  of  the 
property  without  co-insurance,  will  be  premiums  $5000, 


THE  CO-INSURANCE  CLAUSE  191 

losses  to  the  insurance  company  $5000,  and  it  is  minus 
its  expenses,  which  at  35  per  cent,  would  amount  to 
$1750.  The  company  writing  without  the  co-insurance 
clause,  or  at  half  value,  has  made  a  loss  of  $1750  or  about 
35  per  cent.,  but  this  loss  does  not  fall  upon  the  company. 
Every  company  recoups  its  losses  by  an  increased  assess- 
ment of  tax  in  some  other  direction,  and  the  result  is  that 
the  neighbors  of  the  man  who  had  these  1000  dwellings 
are  assessed  to  pay  the  $1750  losses  made  in  handling  his 
business,  together  with  a  small  profit  which  is  needed  for 
the  company  to  continue  in  business.  Is  it  fair  to  the 
owners  of  property  throughout  the  state,  who  have  been 
mulcted  to  pay  the  loss  on  this  individual  because  he  was 
improperly  assessed? 

The  following  illustration  of  President  Evans  of  the 
Continental  also  shows  how  unfair  is  a  policy,  without  the 
co-insurance  clause,  issued  at  the  same  rate  as  one  contain- 
ing the  clause. 

A  and  B  each  own  a  half  interest  in  a  building  having  a 
present  structure  value  of  $20,000.  Each  insures  his  half 
interest  separately  and  in  different  companies;  each  com- 
pany charges  the  same  percentage  or  ''rate"  for  insuring 
the  property,  and  that  "rate"  is  1  per  cent,  or  $10  for 
$1000  of  insurance.  A  insures  his  half  in  the  Y  com- 
pany for  $10,000  and  pays  for  his  policy  $100.  B  insures 
his  half  in  the  Z  company  for  $5000  and  pays  for  his  policy 
$50.  A  fire  occurs  and  the  building  is  damaged  $10,000 
only.  Company  Y,  insuring  A,  is  called  on  to  pay  but  50 
per  cent,  of  the  amount  of  its  policy,  while  company  Z 
pays  100  per  cent.;  and  yet  company  Y  received  twice 
as  much  premium  as  did  company  Z. 

It  is  sometimes  impossible  for  the  owner  of  property  of 
a  movable  character,  changing  its  location  from  day  to 
day,  and  often  from  hour  to  hour  in  each  day,  as  in  the 
case,  for  example,  of  the  product  of  a  paper-mill,  which 
in  the  morning  may  be  in  the  paper-machines  at  one  end 
of  the  mill  and  by  evening  in  the  dryhouse,  to  accept 


192  YALE  READINGS  IN  INSURANCE 

insurance  covering  specifically.  Under  such  circumstances 
the  distribution  form  of  the  average  clause  may  be  used, 
which  practically  secures  specific  insurance  in  that  pro- 
portion which  the  insured  would  fix  at  the  moment  of  a 
fire,  if  lie  knew  the  value  in  each  location.  In  short,  the 
policy  applies  for  such  proportion  of  its  amount  in  any  one 
location  as  the  value  in  such  location  bears  to  the  value 
in  all  locations. 

Of  course,  the  full  co-insurance  clause,  the  insurance 
being  equal  in  amount  to  the  value  of  all  of  the  property, 
no  matter  where  located,  would  take  care  of  the  interest 
both  of  the  assured  and  of  the  company,  but  the  property 
owner  is  not  always  willing  to  have  a  full  co-insurance 
clause,  and  under  the  mistaken  legislation  of  some  states 
the  use  of  any  average  or  co-insurance  clause  is  prohibited. 
The  full  co-insurance  clause  provides  that  whatever 
fraction  or  percentage  of  the  value  is  destroyed  that  frac- 
tion of  the  insurance  is  payable.  If  one-half  the  value 
is  insured  one-half  the  loss  is  collectible  from  the  insurance 
company.  If  the  whole  value  is  destroyed  the  whole 
insurance  is  collectible. 

Let  us  suppose  a  merchant  ha\dng  goods  stored  in  two 
different  warehouses,  A  and  B,  so  located  relatively  that 
they  could  not  burn  by  one  and  the  same  fire.  In  A 
he  has  $6000  and  in  B  $3000.  If  he  should  take  out  a 
policy  of  $6000  covering  in  both,  without  specific  amounts 
and  without  the  average  clause,  it  is  clear  that  the  policy 
would  effectually  protect  him,  since  a  loss  in  either  build- 
ing would  be  covered  by  his  insurance,  and  hence  an  insur- 
ance of  $6000  would  be  almost  as  effectual  as  an  insurance 
of  $9000  written  specifically,  the  only  chance  of  his  losing 
more  than  $6000  being  in  case  both  buildings  should 
happen  to  burn  at  the  same  time.  Any  intelligent  under- 
writer would  decline  to  issue  such  a  policy  except  at  double 
rate;  but  if  the  merchant  should  claim  that  he  could  not 
tell  at  any  one  time  just  what  proportion  of  value  would 
be  in  each  warehouse  and  for  that  reason  alone  could  not 


THE  CO-INSURANCE  CLAUSE  193 

insure  specifically,  and  is  unwilling  to  pay  for  insurance 
in  excess  of  two-thirds  of  the  value,  the  "distribution 
form"  of  the  average  clause  would  adjust  the  matter  so 
that  the  policy  would  cover  in  each  in  proportion  as  its 
value  should  bear  to  that  in  both.  This  would  be  better 
than  a  specific  policy  for  his  purpose  and  equally  as  fair 
for  the  underwriter,  since  its  effect  would  be  to  distribute 
the  insurance  at  the  time  of  the  happening  of  a  fire  so  as 
to  cover  or  apply  in  each  warehouse  in  the  proportion 
that  the  value  in  such  warehouse  bears  to  the  value  in 
both.  The  insurance  on  this  plan  is  thus  made  to  follow 
the  value,  no  matter  how  often  it  fluctuates. 

Let  us  suppose  the  values,  then,  are  $6000  in  A  and 
$3000  in  B  and  that  a  fire  occurs  doing  a  damage  in 
A  of  $4000;  as  the  insurance  covers  in  this  building 
in  the  proportion  that  its  value  ($6000)  bears  to  the  value 
in  both  ($9000),  two-thirds  of  the  insurance,  or  $4000 
would  attach  in  A  and  in  this  case  be  sufficient  to  pay 
the  loss. 

Under  the  full  co-insurance  clause,  by  which  the  policy 
pays  that  proportion  of  the  loss  that  the  whole  insurance 
($6000)  bears  to  the  whole  value  of  the  property  ($9000), 
or  two-thirtls,  the  owner  would  only  receive  two-thirds  of 
his  loss  of  $4000,  or  $2666.66 

If  instead  of  the  full  co-insurance  clause,  the  SO  per  cent, 
co-insurance  clause  is  used,  the  policy  for  $6000  would  pay 
such  proportion  of  the  loss,  $4000,  that  $6000  bears  to 
$7200  (80  per  cent,  of  $9000)  or  five-sixths  of  it,  i.e., 
$3333.33. 

Ill 

Two  vital  questions  confront  the  fire  insurance  company 
with  every  policy  it  issues:  1.  Is  the  property  insured  for 

1  By  A.  F.  Dean,  Assistant  Manager,  Western  Department  of  the 
Springfield  Fire  and  Marine  Insurance  Company.  Reprinted  from 
pages  119-125  of  "The  Rationale  of  Fire  Rates";  J.  M.  Murphy. 
Chicago,  1901. 


194  YALE  READINGS  IN   INSURANCE 

too  great  a  proportion  of  its  value?  2.  Is  it  insured  for 
too  small  a  porportion  of  its  value? 

In  the  first  instance  the  owner  may  become  indifferent 
to  the  care  of  his  ])roperty,  or  even  have  a  direct  incentive 
to  destroy  it  by  fire. 

In  the  second  instance  the  company  does  not  receive 
sufficient  compensation  for  the  risk  it  assumes,  and  the 
owner  secures  more  indemnity  than  he  pays  for,  thus 
obtaining  an  advantage  over  other  people  who  pay  for 
what  they  get. 

The  problem  of  securing  a  uniform  relation  between 
insurance  and  value  confronts  every  company  in  the 
acceptance  of  every  risk;  for  it  is  an  established  principle 
in  fire  underwriting  that  rates  cannot  be  made  intelligently 
and  fairly  except  on  the  theory  that  all  property  is  insured 
for  about  the  same  proportion  of  its  value.  It  makes  no 
difference  what  this  proportion  be  if  everybody  be  insured 
for  the  same  proportion.  If  all  property  were  insured  for 
only  one-fourth  of  its  value,  statistical  experience  would 
soon  reveal  the  projier  rate  for  property  insured  for  one- 
fourth  value;  but  if  one  man  has  his  property  insured  for 
one-fourth  its  value,  and  another  for  three-fourths,  the 
former  may  receive  as  much  indemnity  in  the  event  of 
partial  loss  as  the  latter,  who  paid  three  times  as  much 
for  his  insurance. 

It  is  impossible  for  the  company  or  its  agent,  or  even 
the  owner  himself,  to  estimate  closely  the  value  of  prop- 
erty, and  even  if  it  could  be  estimated,  values  are  con- 
stantly fluctuating.  The  only  way  to  adjust  the  matter 
to  ensure  equity  to  all  concerned  must  be  through  a  mutual 
agreement  that  if  the  property  is  not  insured  for  a  stipu- 
lated proportion  of  its  value  at  the  time  of  the  fire,  the 
assured  shall  be  a  co-insurer  for  the  deficit. 

This  simple  plan  of  adjusting  a  difficult  problem  is  so 
fair  that  the  use  of  the  co-insurance  clause  is  world-wide. 
In  France,  Italy,  Spain,  Portugal,  Belgium,  and  the 
Rhenish  Provinces,  the  co-insurance  clause  is  required  by 


THE  CO-INSURANCE  CLAUSE  195 

law,  and  in  other  parts  of  Europe  the  agreement  is  invari- 
ably made  a  part  of  the  policy  contract. 

It  is  singular  that  what  is  obligatory  throughout  Europe 
is  prohibited  in  this  country  by  law.  At  the  present  time 
ten  prominent  states  of  the  Union  forbid  the  use  of  the 
co-insurance  clause.  The  only  explanation  ever  given  for 
this  prohibition  of  co-insurance  is  that  it  encourages  over- 
insurance,  but  many  of  the  states,  while  prohibiting 
co-insurance  on  this  ground,  have  enacted  a  valued-policy 
law  which  offers  an  incentive  for  people  to  over-insure 
their  property.  Besides,  a  co-insurance  clause  that  makes 
the  agreed  proportion  between  the  insurance  and  value 
80  or  90  per  cent,  does  not  encourage  over-insurance. 

Aside  from  the  mathematical  necessity  for  a  uniform 
relation  of  insurance  to  value  in  establishing  equitable 
rates,  co-insurance  is  the  safeguard  that  protects  small 
property  owners  from  the  cunning  devices  of  large  cor- 
porations in  their  efforts  to  avoid  the  payment  of  their 
share  of  the  fire  tax.  If  the  facts  could  be  once  under- 
stood, there  would  be  not  only  a  popular  demand  for  the 
repeal  of  all  laws  prohibiting  co-insurance,  but  a  demand 
for  the  enactment  of  the  European  laws  which  make 
co-insurance  obligatory ;  because  the  European  laws  ensure 
a  just  distribution  of  rates,  while  the  American  laws  put 
it  in  the  power  of  the  propertied  interests  to  unload  a  share 
of  their  fire  tax  upon  people  of  small  means.  The  evasion 
of  the  fire  tax  in  this  way  is  no  less  notorious  or  unjust 
than  the  evasion  of  state  and  municipal  taxes.  It  is 
difficult  to  make  this  plain  to  one  not  versed  in  fire  insur- 
ance. In  fact,  the  vital  bearings  of  co-insurance  on  rates 
are  not  appreciated  by  the  majority  of  fire  underwriters. 
The  importance  of  the  subject,  however,  justifies  the  follow- 
ing explanation: 

It  should  be  borne  in  mind  that  but  a  small  proportion 
of  fire  losses  are  total.  Out  of  twenty  claims  made  against 
the  companies,  on  a  low  estimate  nineteen  are  partial 
losses,  ranging  from  a  merely  nominal  damage  up  to  the 


196  YALE  READINGS  IN  INSURANCE 

ncai-ly  full  value  of  the  property.  This  average  of  partial 
losses  is  enormously  increased  when  the  property  insured 
is  not  all  subject  to  one  fire.  In  nearly  all  large  whole- 
sale and  manufacturing  establishments  the  contents  are 
located  in  different  compartments,  which  are  separated 
by  brick  walls  with  fire-proof  doors  and  shutters  over 
every  ojx-ning.  Sometimes  the  property  is  located  in  a 
number  of  different  buildings.  When  a  fire  starts  in  one 
compartment  or  building,  the  fire  department,  in  ninety- 
nine  cases  out  of  a  hundred,  is  able  to  confine  it  to  that 
compartment  or  building,  so  that  in  establishments  of 
this  kind  a  total  loss  seldom  or  never  occurs. 

The  practice  in  American  fire  underwriting,  up  to  about 
fifteen  years  ago,  was  to  require  a  specific  amount  of  in- 
surance upon  every  building,  and  when  a  building  was 
divided  by  solid  brick  walls  with  fire-proof  doors,  a  sepa- 
rate amount  of  insurance  was  recjuired  to  be  placed  on 
and  in  each  compartment. 

The  reason  for  this  was,  that  if  the  insurance  were 
spread  to  cover  the  entire  establishment  in  one  item  of 
insurance,  the  owners  would  need  only  enough  insurance 
to  cover  the  value  in  one  compartment  or  building,  as  this 
would  be  enough  to  cover  all  possible  loss.  The  equity 
of  the  regulation  regarding  specific  insurance  was  so  plain 
that  large  merchants  and  manufacturers  could  not  reason- 
ably object  to  it,  and  specific  insurance  was  the  rule 
throughout  the  country,  but  it  was  found  that  specific 
insurance  worked  an  injustice  to  property  owners  in  one 
respect.  The  owner  knew,  at  least  approximately,  how 
much  insurance  he  needed  on  each  building,  but  it  was 
impossible  for  him  to  tell  how  much  he  needed  on  the  con- 
tents of  each  building.  If  a  mercantile  stock,  the  value 
in  each  compartment  or  building  was  constantly  changing, 
and  he  could  not  keep  his  books  to  show  the  value  in  each 
compartment;  if  a  manufacturing  plant,  the  property  in 
process  of  manufacture  was  constantly  shifting  from  one 
part  of  the  establishment  to  another,  and  it  was  impos- 


THE  CO-INSURANCE  CLAUSE  197 

sible  to  estimate  from  the  books  the  vahie  of  the  propci'ty 
in  any  one  building  or  compartment.  Wliolesale  mer- 
chants and  large  manufactm'ers  of  all  kinds  began  to  insist 
that  they  must  have  their  insurance  arranged  to  cover 
any  part  of  their  establishment  where  fire  might  occur. 
The  companies  then  proposed  to  issue  policies  under  a 
blanket  form  (that  is,  covering  the  entire  property  in 
one  sum),  provided  the  assured  would  agree  to  keep  the 
property  insured  for  80  per  cent,  of  its  value,  and  if  the 
insurance  at  the  time  of  the  fire  should  be  less  than  that 
proportion,  the  insured  should  be  a  co-insurer  for  the 
difference  between  the  amount  of  insurance  and  80  per 
cent,  of  value. 

People  readily  accepted  this  equitable  arrangement, 
which  relieved  them  from  the  care  of  constantly  watch- 
ing values  in  each  compartment  to  see  that  the  insurance 
was  adequate.  In  a  short  time  blanket  policies  with  the 
co-insurance  clause  came  into  general  use,  and  all  the  large 
commercial  and  manufacturing  establishments  of  the 
country  were  insured  under  what  became  known  as  "the 
blanket  form,  with  co-insurance." 

In  time  some  schemer  discovered  that  if  he  could  get 
the  co-insurance  clause  declared  illegal,  it  would  be  pos- 
sible to  reduce  his  insurance  materially,  without  impairing 
the  protection  afforded  by  his  blanket  policy  form.  To 
offer  any  bill  that  seems  inhnical  to  fire  insurance  is  to 
ensure  its  enactment  in  many  states,  and  the  anti-co-in- 
surance law  lias  been  spreading  ever  since  under  the  active 
encouragement  of  interested  property  owners. 

This  law,  coupled  with  the  law  forbidding  tariff  rates, 
creates  a  condition  in  fire  insurance  as  absurd  as  if  the 
state,  which  requires  its  tax  officials  to  take  oath  that  they 
will  spread  taxes  equitably,  should  at  the  same  time  for- 
bid them  to  fix  a  uniform  tax  percentage,  or  to  establish 
property  valuations. 

The  concession  of  blanket  insurance  was  obtained  on 
the  condition  of  co-insurance;  now  the  great  trusts  of  the 


198  YALE  READINGS  TN  INSURANCE 

country  are  claiming  the  benefits  of  blanket  insurance 
without  co-insurance.  Under  the  anti-co-insurance  law 
there  has  been  a  constant  reduction  of  insurance  to  value 
on  every  risk  insured  under  a  blanket  form,  and  it  is  well 
within  bounds  to  say  that,  in  the  aggregate,  such  risks  are 
not  insured  for  over  40  per  cent,  of  value,  and  the  owners 
are  securing  their  fire  indemnity  for  about  half  what  they 
would  have  to  pay  for  protection  under  a  specific  form, 
thus  securing  their  insurance  at  an  advantage  over  people 
of  small  means  whose  property  is  usually  located  in  one 
building,  and  subject  to  total  destruction  by  a  single  fire. 

Co-insurance  was  not  required  when  msuring  dwellings, 
stores,  schools,  public  buildings,  or  other  similar  property. 
There  are  thousands  of  towns  throughout  the  country 
where  the  clause  was  never  heard  of,  and  where  the  people 
have  no  direct  mterest  in  the  subject;  but  indirectly  every 
small  property  owner  is  interested,  because  the  prohibition 
of  co-insurance  benefits  no  one  but  the  great  concerns 
whose  distributed  property  is  usually  located  in  cities,  or 
under  the  protection  of  private  fire  departments.  Blanket 
insurance  enables  these  concerns  to  evade  their  just  share 
of  the  insurance  tax  at  the  expense  of  the  community  at 
large,  because  a  corresponding  increase  is  made  in  the  loss 
ratio  shown  by  the  statistics  upon  which  rates  are  estab- 
lished. 

It  is  proper  to  add  that  the  principle  of  co-insurance 
has  always  been  applied  to  marine  insurance,  though  the 
reasons  are  not  so  logical  as  in  fire  insurance,  because  in 
the  marine  risk  the  property  is  all  exposed  to  loss,  while 
in  a  large  proportion  of  fire  risks  the  property  is  so  dis- 
tributed that  it  is  not  subject  to  total  loss.  No  explana- 
tion has  ever  been  given  why  our  laws  permit  the  universal 
use  of  co-insurance  in  marine  insurance  while  prohibiting 
it,  with  severe  penalties,  in  fire  insurance. 


CHAPTER  XI 

DISCRIMINATION   AND    COOPERATION   IN   FIRE   INSURANCE 
RATING  ^ 

I.   Discrimination 

Discrimination  in  fire  insurance  rating  has  two  effects. 
First,  substantial  injustice  is  done  to  competitors,  be 
those  competitors  individuals,  corporations,  or  cities; 
second,  maladjustment  of  fire  insurance  rates  has  a  very 
serious  effect  upon  the  annual  fire  loss  of  the  country. 
Not  much  has  been  heard  of  this  second  effect,  but  there 
are  reasons  for  believing  that  it  is  of  more  importance 
than  the  injustice  which  is  done  to  competitors  thi'ough 
discriminating  rates. 

The  losses  by  fire  in  the  United  States,  direct  and  in- 
direct, amount  to  more  than  half  a  billion  dollars  annually. 
Much  attention  is  being  directed  to  this  fire  waste,  and  its 
causes  and  remedies  are  being  sought.  A  great  deal  is 
being  said  about  the  ignorance  of  American  builders,  and 
of  the  extravagance  of  Americans  in  general  in  allowing 
such  a  tremendous  waste  to  go  on,  not  diminishing  in 
amount,  but  actually  increasing  year  after  year.  These 
accusations  are  largely  unfounded.  Nowhere  in  the  world 
has  the  art  of  constructing  fire-proof  buildings  made  such 
progress  as  in  the  United  States;  therefore  if  Americans 
build  badly,  it  is  for  some  other  reason  than  ignorance. 
Americans  may  be  extravagant  in  their  personal  expendi- 
tures, but  better  building  is  a  business  proposition,  and  it 

'  By  Lester  W.  Zartman,  Assistant  Professor  of  Political  Economy 
in  Yale  University.  Reprinted  from  the  August  number  of  the  Yale 
Review,  1909. 

199 


200  YALE  READINGS  IN  INSURANCE 

would  be  rather  difficult  to  prove  that  American  business 
men  as  a  rule  are  not  quick  to  take  advantage  of  ways  of 
saving  money  in  business.  As  a  matter  of  fact,  a  con- 
siderable amount  of  the  loss  by  fire  is  suffered  in  the  United 
States  because  it  would  be  unprofitable  to  try  to  prevent 
the  loss.  The  relative  costs  of  combustible  construction 
and  fire-resisting  construction  have  varied  so  widely  that 
it  has  been  cheaper  to  build  as  we  have  and  let  buildings, 
and  even  cities,  burn  up  occasionally  than  to  attempt  to 
prevent  the  loss  by  constructing  better  buildings. 

The  principle  can  be  laid  down  that,  in  general,  if  fire 
insurance  rates  are  properly  adjusted,  a  community  will 
have  just  that  amount  of  good  construction  which  is 
profitable  for  it  to  have.  In  other  words,  the  problem 
of  reducing  waste  by  fire  is  the  problem  of  the  cost  of  fire- 
proof materials  and  insurance  rates.  Prospective  builders 
learn  how  much  different  types  of  buildings  will  cost; 
they  then  find  out  what  the  rate  of  fire  premiimi  is  on  each 
type  and  build  accordingly.  No  one  can  doubt  that  the 
rates  of  fire  insurance  have  a  tremendous  effect  upon  the 
character  of  construction.  If  an  improvement  in  con- 
struction from  the  fire  standpoint  is  to  be  made,  it  will 
come  as  a  result  of  a  reduction  in  the  premium  rate  for 
insmance.  In  order  to  secure  the  improvement  there 
must  be  enough  saving  in  the  insurance  to  pay  interest 
upon  the  additional  capital  needed  for  the  better  construc- 
tion and  enough  more  to  provide  a  sinking  fund  to  replace 
the  extra  capital  after  a  certain  number  of  years.  There- 
fore one  of  the  most  important  things  to  consider  in  dis- 
cussing the  problem  of  the  fire  loss  is  the  question  of  fire 
insurance  rating.  If  rates  measure  correctly  the  various 
hazards,  then  the  whole  attention  may  be  directed  to 
securing  cheap  fire-proof  construction. 

Do  the  rates  of  fire  insurance  measure  correctly  the 
various  hazards?  From  time  to  time  the  charge  is  made 
that  they  do  not.  Wliy  they  do  not  and  what  attempts 
have  been  made  on  the  part  of  the  companies  to  make 


DISCRIMINATION  AND  COOPERATION  201 

rates  conform  to  hazards,  it  is  the  purpose  of  the  present 
paper  to  show. 

Those  who  have  given  the  subject  of  fire  insurance 
rating  any  thought  recognize  the  extreme  complexity  of 
the  problem.  In  life  insurance  the  medical  director  of 
each  company,  in  selecting  risks,  has  in  mind  a  standard 
man  —  not  a  physically  perfect  man,  but  one  who  he 
thinks  will  live  at  least  a  certain  number  of  years.  Every 
applicant  who  comes  up  to  the  requirement  of  this  stand- 
ard man  is  accepted;  with  most  companies,  all  those  I'isks 
which  do  not  come  up  to  the  standard  are  rejected.  Com- 
petition among  the  life  insurance  companies  in  the  payment 
of  dividends  brings  them  all  to  much  the  same  stand- 
ard. How  different  it  is  in  the  fire  insurance  business! 
Wliere  is  the  standard  building,  the  average  risk?  Frame 
buildmgs  have  one  hazard  of  burnmg,  brick  buildings 
have  another;  frame  churches  have  one  hazard,  frame 
factories  have  an  entirely  different  hazard.  There  is  one 
loss  record  on  frame  warehouses  that  are  isolated  from 
other  buildings,  and  another  loss  record  on  those  frame 
warehouses  which  are  adjacent  to  other  buildings.  Each 
class  of  buildings  has  its  own  peculiar  hazards,  and  every 
combination  of  buildings  within  each  class  and  with  those 
of  other  classes  has  a  different  hazard ;  the  number  of  com- 
binations, each  producing  its  own  risk  of  fire  is  infinite. 
Complicate  this  situation  with  the  hazards  of  various 
kinds  of  occupancy,  and  the  problem  of  getting  at  correct 
fire  rates  is  apparently  insoluble.  As  if  this  were  not 
enough  to  make  the  problem  difficult,  there  is  still  the 
change  ceaselessly  taking  place  in  methods  and  materials 
of  construction  and  in  the  processes  carried  on  within 
buildings.  Human  life  has  experienced  some  alteration  in 
2000  years,  but  every  succeeding  phase,  at  least  in  modern 
times,  has  been  marked  by  a  greater  longevity.  This  has 
made  the  business  of  life  insurance  constantly  more  secure. 
In  fire  insurance  the  changes  in  hazards  are  taking  place 
so  rapidly  that  if  the  companies  had  had  exact  data  twenty 


202  YALE  READINGS  IN  INSURANCE 

years  ago  on  which  to  base  rates,  they  would  be  nearly 
useless  to-day.  The  growth  of  cities,  the  concentration 
of  population,  the  building  of  sky-scrapers,  the  use  of 
electricity  for  light  and  power,  the  changed  methods  and 
machinery  in  factories  —  all  these  have  created,  within 
a  short  period,  a  new  world  for  the  fire  insurance  business. 

Lastly,  to  complicate  the  rating  situation,  there  are  the 
conflagrations.  The  nearest  analogy,  taking  such  catas- 
trophes in  account,  would  be  life  insurance  companies 
attempting  to  carry  on  their  business  under  the  conditions 
which  prevailed  in  mediaeval  times  in  Europe,  when  ter- 
rible epidemics  swept  over  the  country  carrying  off  at  times 
a  quarter  of  the  population.  To  carry  on  the  business  of 
life  insurance  under  such  conditions  would  be  well-nigh 
impossible;  yet  in  the  fire  insurance  field,  the  conflagra- 
tions to-day  are  almost  as  disturbing  a  factor  as  such 
epidemics  would  be  in  that  of  life  insurance.  Feared  by 
all  careful  managers,  subject  to  no  known  law  of  average, 
they  introduce  a  new  complexity  into  what  is  already  a 
maze  of  complexities. 

Under  such  conditions  what  progress  has  been  made 
towards  securing  scientific  rating?  Space  will  permit  no 
more  than  a  brief  outline  of  the  development  which  has 
taken  place.  In  the  early  history  of  fire  insurance  the 
rating  system  was  extremely  simple.  All  risks  were  di- 
vided into  two  classes,  brick  buildings  and  frame  buildings, 
and  the  premium  on  frame  buildings  was  double  that  on 
brick  buildings.  About  1720,  risks  in  England  were 
divided  into  three  classes,  and  for  a  century  and  a  quarter 
this  change,  with  but  few  modifications,  was  all  the  advance 
made  by  English  companies  towards  scientific  fire-rating. 
It  was  in  the  year  1800  that  companies  in  New  York  City 
began  first  really  to  classify  risks,  all  risks  being  grouped 
under  four  classes,  and  a  rate  fixed  for  each  class.  Progress 
in  rating  advanced  slowly.  As  late  as  1856,  more  than  a 
century  after  the  establishment  of  the  first  fire  insurance 
company  in  America,  a  prominent  official  of  one  of  the 


DISCRIMINATION  AND  COOPERATION  203 

companies  asserted  that  nothing  more  was  known  about 
the  actual  cost  of  insuring  different  risks  than  was  known 
when  the  first  company  was  estabhshed. 

Up  to  1835  there  was  not  much  need  for  the  companies 
to  know  the  cost  of  insuring  various  classes  of  risks,  for 
up  to  that  time  the  business  of  each  company  had  been 
largely  local.  Competition  was  not  keen,  and  the  com- 
panies simply  fixed  rates  high  enough  to  be  sure  of  a 
profit.  But  when  the  New  York  conflagration  of  1835 
and  another  in  1845  showed  the  companies  that  it  was 
fatal  to  concentrate  their  business  in  one  locality  conditions 
were  seen  to  have  become  vastly  different;  the  companies 
began  to  spread  out  in  order  to  get  a  wide  distribution 
of  risks.  They  thus  came  in  contact  with  each  other, 
competition  became  intense,  and  rates  went  down.  How 
low  they  could  go  and  still  allow  a  profit  to  be  made  the 
managers  of  the  companies  did  not  know.  As  a  matter 
of  fact  the  rates  sank  too  low,  and  the  companies  lost 
heavily.  This  keen  competition  for  business,  with  the 
consequent  fall  in  profits,  had  an  important  effect  upon 
the  methods  of  conducting  the  business.  Managers  found 
it  necessary  to  know  more  about  the  cost  on  various  kinds 
of  hazards,  and  classification  of  risks  was  taken  up  i» 
earnest.  To-day  all  the  companies  are  classifying  the 
risks  which  they  insure,  though  this  activity  amounts 
to  scarcely  anything,  inasmuch  as  no  advance  has  been 
made  over  the  start  given  seventy  years  ago. 

After  classification  of  risks,  the  next  step  towards  better 
fire-rating  was  the  adoption  of  the  system  of  rating  certain 
classes  of  risks  by  schedules.  It  is  not  known  exactly  how 
schedule  rating  originated.  So  far  as  information  is 
available,  one  of  the  earliest,  if  not  the  first,  of  the  applica- 
tions of  the  method  was  made  in  1852  by  the  Philadelphia 
Board  of  Fire  Underwriters;  the  schedule  adopted  was 
simple  and  was  intended  to  apply  to  Philadelphia  alone. 
From  that  time  to  this  a  considerable  number  of  schedules 
have  been  worked  out  by  the  various  underwriting  asso- 


204  YALE  READINGS  IN  INSURANCE 

ciations;  at  the  present  time  many  different  schedules 
are  in  use,  though  there  is  a  gradual  tendency  towards  the 
adoption  of  two,  the  Universal  Mercantile  Schedule  and 
the  Dean  Schedule,  the  latter  being  at  the  present  time 
more  popular  than  any  other  schedule  that  has  ever  been 
devised. 

Schedule  rating  is,  in  essence,  the  attempt  to  secure 
scientific  rating  by  an  elaborate  system  of  classification. 
Under  this  schedule  system,  rates  are  made  by  applying 
to  classes  of  risks  and  to  individual  risks  certain  predeter- 
mined charges  and  credits  based  upon  the  various  factors 
of  construction,  occupancy,  degree  of  exposure  to  and  of 
protection  against  fire.  For  instance,  in  getting  the  rate 
for  a  specific  building  there  is  what  is  known  as  the  basis 
rate,  which  is  the  rate  made  upon  a  certain  type  of  build- 
ing; in  one  schedule  it  is  a  simple,  one-story,  brick  building; 
in  another  it  is  a  well-built,  five-story  building.  The  basis 
rate  having  been  determined,  it  is  applied  to  the  risk  to  be 
rated;  then  the  various  defects  in  construction,  dangerous 
factors  of  arrangement  and  deficiencies  in  the  nature  and 
extent  of  the  apparatus  for  fire  protection  are  listed  with 
fixed  or  percentage  charges  for  each  deviation  from  the 
standard;  credits  are  then  allowed  in  the  schedule  for 
features  of  equipment  or  construction  better  than  those 
possessed  by  the  standard  building.  Add  the  charges  to 
the  basis  rate,  subtract  the  credits,  the  remainder  is  the 
rate  upon  the  specific  risk.     This  is  schedule  rating. 

That  the  system  of  rating  by  schedules  is  a  great  im- 
provement over  the  old  method  of  judgment  rating  is  well 
recognized.  Especially  is  the  adoption  of  the  schedule 
system  of  importance  in  securing  better  construction. 
Under  the  system  where  the  special  agent  is  told  that 
the  average  premium  rate  on  warehouses  for  the  last  ten 
years  has  been  one  dollar  and  thirty-two  cents,  with  a  loss 
ratio  of  43  per  cent.,  and  is  then  sent  out  to  make  rates  on 
such  buildings,  no  one  can  tell  what  rate  his  particular 
building  will  receive.     If  a  man  is  contemplating  building 


DISCRIMINATION  AND  COOPERATION  205 

a  new  warehouse,  or  making  changes  in  an  old  one,  and 
desu-es,  if  it  pays,  to  improve  the  fire  hazard  by  better 
construction,  all  that  the  agent  can  do  is  to  tell  him  to  go 
ahead  and  build,  and  then  a  rate  will  be  made.  With  such 
uncertainty,  no  one  is  likely  to  consider  the  fire  rates  a 
great  deal.  Under  a  system  of  schedule  rating,  even  one 
inexperienced  in  fire  insurance  matters  can  take  most 
of  the  schedules  and  figure  out  precisely  what  reduction 
in  rate  will  be  given  for  better  construction.  Will  it  pay 
to  enclose  the  elevator  wells  with  brick  walls?  Look  up 
the  schedule  and  find  out;  for  all  is  determined  beforehand. 
The  schedule  system  recognizes  to  a  large  extent  what 
must  be  acknowledged,  namely,  that  each  building  has 
an  individuality  of  its  own.  Fire  insurance  must  attempt 
to  measure  the  hazard  of  each  individual  risk,  and  fit  it 
with  a  specific  rate ;  and  this  it  does  attempt  to  do  through 
the  schedule  system  of  rating. 

As  has  been  said,  the  schedule  system  of  rating  is  a 
great  advance  over  the  old  method  of  judgment  rating; 
but  much  remains  to  be  accomplished.  If  the  charges  and 
the  credits  in  the  schedule  were  determined  by  the  knowTi 
experience  of  the  companies  - —  if  shingle  roofs,  for  ex- 
ample, were  penalized  10  per  cent,  because  the  hazard  of 
burning  were  known  to  be  increased  10  per  cent,  by  their 
presence,  and  these  charges  and  credits  were  continually 
revised  in  the  light  of  new  experience  —  the  business  of 
fire  insurance  would  have  reached  its  highest  development. 
Such  is  not  the  case.  Charges  and  credits  are  not  based 
on  facts;  the  schedules  so  far  constructed  have  simply 
substituted  for  the  judgment  of  one  rating  expert,  the 
combined  judgment  of  a  number  of  experts.  This  can 
well  be  illustrated  by  the  history  of  the  Universal  Mercan- 
tile Schedule:  half  a  dozen  different  underwriting  associa- 
tions ap])ointed  representatives  to  formulate  a  schedule; 
from  the  thirty-seven  representatives  appointed  a  com- 
mittee of  four  was  chosen,  which  made  up  a  tentative 
schedule  representing  the  pooled  judgment  of  its  members; 


206  YALE  READINGS  IN  INSURANCE 

this  schedule  was  then  sent  out  to  all  the  raters  in  the  vari- 
ous Eastern  associations  asking  for  suggestions  and  criti- 
cisms, in  the  light  of  which  the  committee  went  over  all 
the  suggestions,  combining  them  as  best  it  could.  This 
process  was  repeated  five  times,  so  that  the  final  schedule 
is  the  result  of  the  combined  judgments  of  a  considerable 
number  of  men  experienced  in  fire  insurance  matters;  but 
while  this  method  produced  a  good  schedule,  the  schedule 
lacks  the  authority  which  one  based  on  statistical  data 
would  possess. 

This  explanation  of  the  ways  in  which  rates  are  deter- 
mined has  been  given  in  order  that  the  following  discus- 
sion of  rate  discriminations  may  be  better  understood. 
The  fact  to  be  kept  in  mind  regarding  all  rates,  schedule 
or  otherwise,  is  that  they  have  no  statistical  basis.  To 
show  that  the  fire  insurance  companies  do  not  have  a 
scientific  foimdation  for  the  rates  which  they  charge  does 
not,  indeed,  prove  that  the  rates  are  inequitable;  unfor- 
tunately, however,  for  the  companies,  when  under  charges 
of  discrimination,  they  cannot  prove  that  their  rates  are 
just,  save  in  the  aggregate.  Such  lack  of  knowledge  is 
bad  for  the  business,  for  it  causes  much  hostility  on  the 
part  of  the  public  and  results  in  much  unwise  legislation. 

Most  fire  insurance  experts  will  readily  admit  that  dis- 
criminations abound  in  fire  insurance  rating.  In  fact  the 
very  terminology  of  the  business  shows  that  all  classes  of 
risks  are  not  rated  according  to  the  risk  of  loss;  almost 
since  the  beginning  of  the  business  there  have  existed 
what  are  known  as  preferred  classes  of  risks  and  others 
known  as  special  hazards.  This  could  not  be  if  all  risks 
were  rated  according  to  the  risk  of  loss,  for  under  such 
conditions  there  would  be  just  as  much  profit  m  insuring 
mills,  warehouses,  and  stores,  as  in  wi'iting  policies  on  dwell- 
ings and  churches.  The  fact  that  this  terminology  of 
preferred  and  special  classes  is  not  merely  the  result  of  a 
traditional  distinction  of  earlier  times,  is  betrayed  by 
the  effort  on  the  part  of  the  companies  to  secure  the  pre- 


DISCRIMINATION  AND  COOPERATION  207 

ferred  classes  of  risks  to-day.  In  many  agencies,  10  per 
cent,  more  commission  is  given  for  preferred  business 
than  is  paid  for  premiums  on  special  hazards. 

Two  interesting  questions  immediately  arise;  why  is  it 
that  the  discriminations  in  rates  are  made,  and  how  is  it 
that  in  such  a  business  as  freely  competitive  as  is  fire 
insurance,  the  distinction  between  preferred  and  special 
risks  can  be  maintained  year  after  year?  It  will  help  us 
in  answering  the  former  query  to  distinguish  various 
kinds  of  rate  discriminations.  First,  there  is  the  dis- 
crimination between  large  classes  of  risks  such,  for  instance, 
as  dwellings  on  one  hand  and  factories  on  the  other; 
second,  there  are  discriminations  between  localities; 
and,  again,  there  are  unjust  rates  as  between  specific  risks. 

Taking  up  in  order  these  varieties  of  rate  discrimination, 
we  first  ask  why  there  are  preferred  classes  of  risks.  These 
classes  exist  because  of  the  desire  on  the  part  of  the  com- 
panies to  assess  rates  in  such  a  way  as  to  arouse  the  least 
opposition.  There  are  many  analogies  between  fire  pre- 
miums and  taxes ;  as  with  governments,  —  which  have 
always  found  it  necessary  to  levy  taxes  not  so  much  with 
regard  to  the  question  of  their  being  ideally  just,  as  to  the 
question  of  whether  they  can  be  imposed  without  raising 
a  storm  of  opposition,  —  so  is  it  with  the  fire  insurance 
companies.  They  have  found  that  they  can  levy  high 
rates  on  dwellings,  on  contents  of  dwellings,  on  churches, 
schoolhouses,  public  buildings  and  kindred  risks  without 
causing  much  opposition.  The  reason  is  not  far  to  seek. 
The  rates  on  dwellings  as  a  class  are  low,  absolutely  speak- 
ing; few  people  have  large  values,  so  that  the  premium 
on  each  risk  is  moderate  and  usually  causes  little  objec- 
tion to  be  made.  Suppose  there  is  some  opposition  to  the 
dwelling  rates;  it  may  result  in  a  man  complaining  to  his 
neighbor  that  the  rates  on  dwellings  are  too  high,  and  the 
neighbor  may  agree  with  him;  but  this  is  about  as  far  as 
the  opposition  ever  gets.  In  the  same  way  high  rates  on 
churches,  schools,  and  similar  property  cause  little  opposi- 


208  YALE  READINGS  IN  INSURANCE 

tion,  but  how  different  is  the  situation  if  the  companies 
make  an  increase  in  rates  on  mercantile  or  factory  risks. 
Practically  every  city  has  its  trade  organization,  a  chamber 
of  commerce,  or  a  board  of  trade,  composed  of  the  leading 
business  men  of  the  city.  Even  a  small  increase  in  rates 
on  risks  owned  by  these  men  makes  a  great  deal  of  differ- 
ence to  them,  for  here  values  are  large.  An  increase  in 
rates  on  risks  owned  by  these  men  means  opposition  — 
and  opposition  which  counts,  for  the  organization  already 
exists  by  which  it  can  be  concentrated.  The  influence 
which  these  boards  of  trade  and  similar  organizations 
can  have  upon  legislation  is  so  powerful  that  any  rating 
organization  thinks  twice  before  it  raises  rates  upon  mer- 
cantile and  manufacturing  risks. 

The  next  question  which  follows  from  this  description 
of  the  condition  in  fire  insm^ance  is  why  in  a  business  so 
fiercely  competitive  as  fire  insurance  there  can  continue 
to  exist  permanent  classes  of  preferred  risks.  If  the  old 
companies  are  in  an  agreement  to  maintain  rates,  why  are 
not  new  companies  organized  to  compete  for  the  preferred 
business,  thus  bringing  rates  down  to  cost?  Suppose  a 
company  were  organized  to  make  a  drive  for  the  preferred 
business.  It  could  get  it  in  two  ways:  it  could  either 
establish  new  agencies,  or  it  could  try  to  enter  into  already 
established  agencies.  Suppose  it  chose  to  establish  new 
agencies,  and  by  reducing  rates  on  dwellings  attempted  to 
secure  business;  about  the  first  man  who  was  approached 
by  the  agent  of  the  reduced-rate-on-dwellings  company 
would  say,  "Reduced  fire  insurance  premiums  are  just 
what  I  want.  At  what  rate  can  you  write  my  factory?" 
The  agent  would  have  to  reply  that  he  could  not  write  the 
factory  at  all.  The  dwelling-house  owner  would  answer 
that,  if  the  agent  could  not  write  the  factory  he  would 
not  change  any  of  his  insurance,  as  the  old  agent  who  had 
always  handled  his  business  had  had  a  pretty  hard  time 
placing  the  factory,  and  it  would  not  be  fair  to  take  the 
dwelling  away  from  him.     Thus  the  agent  for  the  pre- 


DISCRIMINATION  AND  COOPERATION  209 

ferred  class  company  would  have  an  extremely  difficult 
task  in  getting  much  business. 

Suppose  then  our  company,  instead  of  establishing  new 
agencies,  attempted  to  get  into  established  agencies  which 
already  control  many  risks.  The  local  agents  have  no  use 
for  a  company  which  writes  preferred  risks  at  reduced 
rates.  A  local  agent  usually  represents  a  number  of  com- 
panies, and  any  of  these  is  perfectly  willing  to  handle  all 
of  the  preferred  business  which  the  agent  controls.  The 
problem  with  the  local  agent  is,  as  we  shall  see,  to  dispose 
of  his  specials.  He  can  do  so  only  by  shrewdly  mixing 
them  up  with  his  preferred  lines.  If  he  gave  the  preferred 
business  to  an  outside  company,  he  could  not  place  his 
less  acceptable  risks.  Thus  it  is  that  the  local  agent 
refuses  ordinarily  to  represent  the  reduced  rate  company, 
and  the  company  organized  to  specialize  in  preferred 
classes  must  get  business  in  some  other  way  than  by  redu- 
cing rates. 

There  are  companies  which  make  a  specialty  of  pre- 
ferred business,  but  their  entry  into  the  field  and  their 
success  in  it  has  not  brought  about  a  better  adjustment 
of  fire  insurance  rates.  Rather  have  they  made  it  worse, 
for,  unable  to  secure  business  in  either  of  the  ways  sug- 
gested above,  they  have  purchased  it  by  the  payment  of 
excessive  commissions.  Wliile  they  have  found  it  im- 
possible to  get  agents  to  give  them  the  preferred  business 
by  offering  to  write  it  at  lower  rates  of  premium,  they  have 
found  it  possible  to  get  some  agents  to  give  them  a  share 
of  it  at  the  old  rates  by  offering  more  commission  than  the 
other  companies  are  accustomed  to  give.  By  doing  this 
they  have  not  benefited  the  public  by  making  rates  more 
equitable,  for  rates  have  not  been  reduced;  rather  have 
they  worked  harm  by  increasing  the  expenses  of  the  busi- 
ness. Thus  are  explained  the  existence  and  continuance  of 
preferred  and  special  hazards  in  fire  insurance. 

The  second  kind  of  maladjustment  of  fire  insurance  rates 
is  that  between  different  localities.     Reference  is  made  to 


210  YALE  READINGS  IN  INSURANCE 

the  relative  rates  between  those  risks  which  are  subject 
to  the  conflagration  hazard  and  those  which  are  not  so 
subject.  It  has  been  asserted  that  if  the  companies  would 
pubUsh  their  experience  in  the  ten  largest  cities  of  the 
country,  it  would  be  shown  that  in  every  one  the  companies 
have  lost  money.  That  rates  should  be  imiversally  too 
low  in  the  larger  cities,  thus  encouraging  poor  construction 
where  good  construction  is  most  needed,  is  due  to  a  number 
of  causes.  In  the  first  place,  there  are  the  conflagrations. 
A  conflagration  is  of  such  sporadic  occurrence  that,  under 
the  conditions  of  competition  which  have  prevailed,  it 
cannot  be  taken  into  consideration  in  making  rates;  that 
this  is  true  is  lamentable,  since  the  best  remedy  for  con- 
flagrations would  be  the  penalty  of  high  insurance  rates 
upon  those  cities  where  a  conflagration  is  possible. 

The  conflagration,  however,  is  not  the  only  cause  of 
unprofitable  underwriting  in  large  cities.  Even  the  cities 
which  have  not  suffered  from  conflagrations  show  a 
balance  on  the  wrong  side  from  the  fire  insm-ance  stand- 
point. Another  cause  must  be  sought;  and  it  is  to  be 
found  in  the  conditions  under  which  the  sale  of  fire  insur- 
ance takes  place  in  large  cities.  The  city  has  evolved  the 
fire  insurance  broker,  who  is  shrewder  in  many  cases  than 
the  underwriters  with  whom  he  deals.  He  takes  advantage 
of  the  ignorance  of  the  companies  in  not  knowing  the  cost 
value  of  the  commodity  in  which  they  deal,  and,  pitting 
one  company  against  another,  is  able  to  drive  a  hard 
bargain.  Yet,  notwithstanding  the  unremunerative  rates, 
the  large  cities  are  to  the  average  manager  tempting  ground 
for  work ;  policies  can  be  written  for  large  amounts  and  a  con- 
siderable premium  income  easily  secured.  The  result  is  that 
ambitious  managers  can  scarcely  refrain  from  establishing 
agencies  in  the  large  cities;  this  makes  competition  for 
business  severe,  and  where  cooperation  among  the  com- 
panies is  needed  most  to  hold  off  the  broker,  cooperation  is 
almost  impossible  because  of  the  number  of  companies  and 
the  number  of  agencies.     Without  cooperation,  rates  are 


DISCRIMINATION  AND  COOPERATION  211 

cut  and  exorbitant  commissions  given  for  poor  business. 
Thus  it  is  that  in  the  places  where  the  heaviest  penalty- 
ought  to  be  placed  on  poor  construction,  the  tendency  is 
to  make  it  light,  and  the  day  of  fire-proof  cities  is  put 
further  away. 

We  come  now  to  a  discussion  of  the  last  kind  of  mal- 
adjustment of  rates,  namely,  those  discriminations  in 
rates  which  are  made  between  specific  risks  rather  than 
between  classes  of  risks  as  a  whole.  There  are  several 
causes  for  these  discriminations.  In  the  first  place,  com- 
panies frequently  accept  risks  at  rates,  which  they  know 
to  be  grossly  inadequate  for  the  risk  assumed,  simply 
because  they  do  not  wish  to  offend  local  agents.  To 
understand  how  this  is  so  it  is  necessary  to  explain  briefly 
how  the  agency  system  is  organized.  A  local  fire  insur- 
ance agent  frequently  represents  from  four  to  twelve, 
sometmies  even  twenty  different  companies;  an  agent 
who  controls  large  risks  needs  to  represent  that  many 
companies,  else  he  could  not  place  all  his  insurance  with- 
out dividing  up  commissions  with  other  agents.  The 
amount,  or  the  "line,"  as  it  is  technically  called,  which 
one  company  is  willing  to  write  on  one  risk  is  limited. 
When  a  risk  is  so  large  that  all  the  companies  in  an  agency 
get  as  large  a  line  as  each  one  wants  on  the  risk,  there  is 
no  quarrel  between  them;  the  conflict  of  interests  arises 
with  the  smaller  risks,  and  every  company,  through  its 
special  agents,  is  continually  urging  the  local  agent  to  give 
it  a  larger  proportion  of  these  smaller  risks.  On  the  other 
hand,  the  local  agent  has  an  assortment  of  risks  under  his 
control  which  no  company  wants  very  much  at  any  rate, 
and  a  good  many  risks  which  none  of  the  companies  want 
at  the  rate  which  is  offered.  And  so  he  takes  advantage 
of  the  situation  and  offers  to  one  of  his  companies  a  number 
of  choice  risks,  preferred  business,  along  with  a  number  of 
risks  which  are  not  so  choice.  The  company  can  take  all, 
or  refuse  all;  for  the  local  agent  will  not  allow  it  to  pick 
the  good  and  leave  the  bad.     Thus  by  shrewdly  playing 


212  YALE  READINGS  IN  INSURANCE 

one  company  off  against  another,  and  by  carefully  mixing 
up  his  risks,  the  local  agent  is  able  to  force  the  companies 
to  take  risks  which  they  ought  not  to  take  at  the  rates 
which  are  offered.  Of  course,  if  it  were  not  for  the  existence 
of  the  preferred  business,  the  agent  could  not  get  the  poor 
risks  in,  but  the  preferred  business  exists,  and  the  manager 
of  the  fire  insurance  company,  in  order  to  get  his  share  of 
it,  will  accept  many  risks  at  inadequate  rates. 

Another  reason  why  rates  on  specific  risks  are  not  fixed 
in  proportion  to  the  hazard  of  loss  is  because  the  principle 
of  charging  what  the  commodity  will  bear  holds  true  in 
fire  insurance  just  as  it  does  in  almost  every  business 
where  there  are  large  fixed  expenses.  The  way  in  which 
this  element  of  fixed  expenses,  with  the  consequent  cutting 
of  rates,  enters  into  the  fire  insurance  business  can  be 
shown  best  by  an  example.  Let  us  assume  that  a  com- 
pany has  established  itself  in  a  large  number  of  agencies 
all  over  the  country ;  to  carry  on  the  business  profitably  it 
must  have  a  well-organized  force  of  special  agents,  and  a 
highly  trained  home  office  staff.  Under  these  conditions 
let  us  assume  further  that  a  risk,  say  a  factory,  is  offered 
to  the  company;  the  company  wants  the  business,  but 
competition  is  keen,  and  a  competitive  rate  must  be  named. 
To  find  out  this  competitive  rate,  it  is  only  necessary  to 
analyze  the  expenditure  of  the  company.  The  total 
premium  income,  in  general,  is  paid  out  as  follows: 

Losses 55  per  cent. 

Commissions    15     " 

Salaries  of  special  agents 5     " 

Maintenance  of  home  office      15     " 

Taxes   3     " 

Profit    7     " 

If  the  burning  ratio  on  the  class  to  which  the  factory  in 
question  belongs  is  $.825  per  hundred,  in  order  to  get 
the  current  rate  of  profit,  to  charge  the  factory  its  pro- 
portion of  the  fixed  expenses  and  to  pay  the  agent  the 


DISCRIMINATION  AND  COOPERATION  213 

regular  commission,  the  company  would  have  to  name  a 
rate  of  SI. 50  per  hundred  on  the  factory.  It  will  not 
charge  that  rate  if  a  lower  rate  is  necessary  to  secure  the 
business  from  a  rival,  and  it  need  not  in  order  to  make 
acceptance  of  the  business  profitable;  as  the  expenses  for 
special  agents  and  home  office  force  will  continue  whether 
that  risk  is  accepted  or  not,  and  both  of  these  can  be  ignored 
in  making  the  rate.  The  tax  will  have  to  be  paid,  and  some 
commission  to  the  local  agent,  though  at  times  the  agent 
is  willing  to  take  a  smaller  commission  in  order  to  induce 
his  company  to  accept  the  risk.  Therefore,  the  company 
can  fix  a  rate  of  $1.00  on  the  risk  and  still  make  a  profit  as 
follows: 

Expected  loss $.825 

Taxes   03 

Commission     10 

which  makes  a  total  expense  of  $.955,  leaving  a  profit 
of  nearly  5  per  cent,  to  the  company  upon  the  transaction, 
even  with  the  heavy  reduction  in  rate.  This  assumed 
situation  reflects  precisely  the  real  condition  in  the  fire 
insurance  world  when  that  business  is  subject  to  free 
competition;  it  explains  the  rate  wars  which  formerly 
occurred  frequently,  and  which  some  large  insurers  and 
legislators  would  evidently  like  to  have  occur  again. 

Along  with  these  improper  adjustments  of  rates  another 
allied  charge  is  made  against  the  fire  insurance  companies, 
namely,  that  the  companies  will  not  reduce  rates  readily 
when  hazards  are  reduced  by  the  adoption  of  better  forms 
of  construction  or  of  fire-preventing  devices.  Some  very 
good  fire  insurance  men  have  said  that  they  are  not  in- 
terested in  reducing  the  fire  loss;  that  it  is  the  only  func- 
tion of  fire  insurance  companies  to  take  losses  as  they 
find  them  and  to  assess  them  on  the  community.  They  are 
right.  That  is  precisely  their  function;  only  they  must 
be  sure  that  they  take  hazards  as  they  find  them  and  not 
as  they  do  not  find  them. 


214  YALE  READINGS  IN  INSURANCE 

It  is  perhaps  safe  to  predict  that  the  fire  insurance  com- 
panies will  never  take  the  lead  in  encouraging  better 
construction  by  granting  rate  reductions  for  improvements 
in  hazards.  There  are  good  reasons  for  this  prediction.  In 
the  first  place,  what  reduction  in  the  rate  should  be  given 
for  an  improvement  in  the  hazard  —  say,  for  example,  for 
the  introduction  of  automatic  sprinklers?  No  one  knows 
until  they  are  tried  for  a  considerable  period,  and  no  one 
is  going  to  try  them  unless  he  can  get  his  fire  rate  reduced ; 
the  insurance  companies  are  not  philanthropic  enough  to 
make  the  experiment,  neither  are  business  men.  The 
result  is  that  only  in  rare  instances  are  improvements 
adopted.  Furthermore,  to  one  very  interested  party  in 
fire  insurance  rating,  a  reduction  in  rates  means  an  actual 
loss  in  income.  Local  agents  the  country  over  are  com- 
pensated by  means  of  a  commission  upon  the  premiums 
secured;  and  reduction  in  rates  means  a  reduction  in  their 
income.  As  the  local  agents  still  play  an  important  part 
in  rate-making,  it  is  contrary  to  human  nature  to  expect 
them  to  become  very  enthusiastic  over  rate  reductions. 
Thus  it  is  that  neither  the  companies,  nor  the  local  agents, 
lead  the  way  in  encouraging  good  construction  by  offering 
rate  reductions  for  lessening  the  danger  from  fire. 

In  summing  up  the  situation  in  regard  to  fire  insurance 
rates,  it  has  been  found  that  in  three  different  respects 
rates  are  not  adjusted  to  the  hazard  of  loss.  There  are 
preferred  classes  of  risks;  cities  are  not  penalized  for  their 
liabilitity  to  suffer  conflagration  losses;  and  there  are 
many  individual  risks  taken  at  improper  rates.  Such 
maladjustment  of  fire  insurance  rates  has  two  effects: 
first,  it  is  a  serious  factor  in  the  business  world  where  com- 
petition is  severe;  second,  it  has  a  most  important  effect 
upon  the  amount  of  the  annual  waste  by  fire.  That  waste 
alone  is  becoming  so  great  that  strenuous  effort  should 
be  made  to  lessen  it;  and  so  far  as  it  is  increased  by  im- 
proper fire  insurance  rating,  every  attempt  to  secure  a 
better  rating  system  should  be  eagerly  welcomed. 


DISCRIMINATION   AND  COOPERATION  215 

II.   Cooperation 

In  the  preceding  section,  it  has  been  pointed  out  that 
rate  discriminations  in  fire  insurance  prevail.  Such  a 
showing  is  no  reflection  upon  the  abiUty  or  the  motives 
of  the  managers  of  our  fire  insurance  companies;  it  is 
not  a  result  which  any  of  them  desires.  In  fact,  the 
officers  of  the  companies  are  more  directly  interested  in 
stopping  these  rate  discriminations  than  is  the  public; 
they  would  like  very  well  indeed  to  have  some  plan  de- 
vised whereby  the  fire  loss  could  be  equitably  assessed 
on  the  different  classes  of  risks.  Frequently  the  impos- 
sibility of  assessing  the  fixed  charges  upon  some  risks  has 
become  so  general  that  the  fixed  charges  are  not  collected 
at  all,  and  the  companies  have  ended  the  year  with  losses 
instead  of  gains  to  their  credit.  To  prevent  this  situa- 
tion from  recurring  and  to  secure  better  conditions  in  the 
fire  insurance  world,  the  companies  have  found  it  neces- 
sary to  work  together,  to  form  what  are  commonly  known 
as  fire  insurance  compacts  or  combinations.  These  com- 
pacts are  of  such  great  importance  in  the  fire  insurance 
business  and  are  the  subject  of  so  much  public  discussion 
that  it  will  be  well  for  us  to  analyze  carefully  the  objects 
for  which  they  are  formed,  and  to  find  out,  if  we  can,  the 
legitimacy  of  each  object.  The  companies  have  cooperated 
for  the  following  purposes: 

1.  To  regulate  rates. 

2.  To  regulate  commissions. 

3.  To  secure  effective  and  economical  supervision  of 
risks. 

4.  To  study  hazards. 

5.  To  repress  incendiarism. 

Is  it  to  the  advantage  of  the  public  that  the  companies 
should  be  allowed  to  cooperate  to  secure  these  objects, 
or  is  it  to  the  injury  of  the  public?  Let  us  consider  each 
of  the  objects  in  order.  Is  a  system  of  compact  rating 
better  for  the  public  than  rates  made  by  competition? 


216  YALE  READINGS  IN  INSURANCE 

We  have  just  learned  that  there  are  three  ways  in  which 
discriminations  in  rates  are  made.  These  evils  are  almost 
entirely  the  result  of  competitive  conditions.  If  the  com- 
panies could  cooperate  closely  enough  they  could  do  away 
with  preferred  classes,  and  increase  rates  on  the  special 
hazards.  They  do  not  dare  to  increase  rates  on  the  latter 
class  because  they  are  afraid  that  the  men  who  own  them 
will  go  to  their  legislatures  and  get  laws  enacted  forbid- 
ding all  cooperation  among  the  companies.  The  large 
cities  get  relatively  low  rates  because  of  the  competitive 
conditions;  and  the  third  variety  of  discrimination  which 
has  been  described  is  due  entirely  to  competition.  If 
these  evils  in  rating  are  the  result  of  free  competition 
between  the  companies  then  the  way  to  abolish  them  is 
to  allow  the  companies  to  cooperate  in  making  compact 
rates. 

The  second  object  which  the  companies  have  sought  to 
obtain  through  cooperation  is  the  regulation  of  commis- 
sions paid  to  agents  for  securing  business.  There  is  almost 
as  much  necessity  for  tariff  commissions  as  there  is  for 
tariff  rates.  There  are  two  ways  of  increasing  the  business 
of  a  company;  one  way  is  to  cut  rates,  and  the  other  is 
to  increase  commissions.  In  many  cases  the  latter  method 
is  more  successful  than  the  former;  to  understand  how 
this  is  true  it  is  only  necessary  to  recall  the  peculiar  organ- 
ization of  the  agencies.  Instead  of  a  company  having  in 
a  city  an  agent  who  represents  it  exclusively,  it  has  one 
who  may  represent  a  dozen  of  its  most  powerful  competi- 
tors. This  is  a  situation  —  a  number  of  rivals  having  a 
common  representative  —  found  in  few  other  businesses, 
and  the  result  is  competition  for  business  within  the  agency. 
If  this  is  unchecked,  it  takes  the  form  of  giving  larger  com- 
missions for  business.  A  local  agent  controls  a  certain 
number  of  risks ;  a  special  agent  may  stir  him  up  to  solicit 
more  risks  and  thus  increase  his  company's  business,  or  the 
special  may  offer  more  commission  to  increase  his  com- 
pany's business  at  the  expense  of  the   competing  com- 


DISCRIMINATION  AND  COOPERATION  217 

panics  in  the  same  agency.  The  competing  companies 
retahate  by  Hkewise  increasing  commissions,  and  the  war 
goes  on  until  all,  or  even  more  than  all,  the  profits  go  to 
the  agents  in  the  shape  of  commissions.  A  union  among 
the  companies  to  regulate  commissions  has  to  be  formed, 
or  all  will  become  bankrupt. 

From  the  standpoint  of  the  public  this  commission  de- 
moralization is  even  more  serious  than  is  rate  demoraliza- 
tion; if  rates  are  cut  the  public  gets  the  benefit,  while  in 
a  commission  fight  expenses  may  be  so  increased  as  to 
make  a  rise  in  rates  necessary.  With  no  commission 
tariff,  an  improvement  in  the  hazard  means  only  an  in- 
creased commission  paid  by  some  company  to  secure  the 
business  from  another  company;  while  losses  are  reduced, 
expenses  are  increased  and  the  net  result  is  the  same  to 
the  public.  Even  from  this  brief  discussion  of  the  com- 
mission problem  it  is  safe  to  conclude  that  cooperation  in 
the  matter  of  commissions  is  almost  as  essential  as  coopera- 
tion in  rating. 

The  third  object  which  the  companies  seek  to  obtain 
through  cooperation  is  effective  and  economical  inspec- 
tion of  risks.  If  rates  are  ever  to  be  adjusted  to  hazards, 
it  will  come  through  better  inspection  of  risks.  One  of 
the  most  serious  objections  which  has  been  raised  to 
present  fire-rating  is  that  good  and  bad  risks  are  lumped 
together  in  one  class  and  given  too  nearly  the  same  rate; 
plainly  the  only  way  in  which  the  companies  can  safely 
discriminate  between  good  and  bad  risks  is  by  making  a 
careful  inspection  of  all  the  risks  insured.  There  is  nothing 
to  prevent  all  the  companies  from  making  such  an  inspec- 
tion, each  for  itself,  except  the  expense  of  doing  it.  But 
this  is  an  insuperable  difficulty;  for  if  each  company  were 
forced  to  inspect  carefully  each  risk  that  it  insured,  the 
expense  of  such  inspection  would  probably  be  much  greater 
than  the  saving  in  losses  which  would  result  from  having 
rates  closely  adjusted  to  hazards.  And  there  is  a  still 
more  serious  objection  to  inspection  of  risks  by  individual 


218  YALE  RE.ADINGS  IN  INSURANCE 

companies;  no  matter  how  thoroughly  a  representative 
of  a  single  company  may  go  about  the  inspection  of  risks 
he  is  not  going  to  accompUsh  much  in  the  improvement 
of  hazards.  Consider  the  situation  as  it  existed  before 
the  companies  began  to  cooperate  in  inspection.  A  com- 
pany's special  agent  would  visit  a  risk;  and  though  he 
might  see  conditions  which  seriously  increased  the  hazards 
of  fire,  yet  the  knowledge  that  other  companies  were 
anxious  to  write  the  risk  as  it  was,  and  that  even  a  reason- 
able request  on  his  part  would  cause  ill-will  toward  his 
company,  would  deter  him  from  requiring  the  removal  of 
defects  which  he  knew  to  be  serious,  but  which  other  com- 
panies had  passed  unchallenged.  It  is  the  same  old  story 
of  competition. 

How  different  is  the  situation  when  the  leading  com- 
panies cooperated  and  established  inspection  bureaus!  No 
matter  how  many  companies  are  now  on  a  risk,  only  the 
authorized  representatives  of  the  inspection  bureau  visit 
the  risk;  and  since  a  few  men  are  performing  the  function 
hitherto  performed  by  many,  experts  can  be  employed, 
and  more  efficient  inspection  is  secured.  Not  only  is  the 
inspection  more  efficient,  but  the  recommendations  made, 
carry  with  them  weight  far  greater  than  those  made  by 
the  representative  of  the  individual  company.  Under  the 
old  system  the  owner  could  view  with  serenity  the  can- 
celation of  the  policy  of  one  company,  since  he  knew  that 
he  could  get  insurance  from  another;  with  the  companies 
associated  together,  the  improvements  recommended  by 
the  inspection  bureau  must  be  made,  or  the  policies,  not 
of  one  company,  but  of  all  the  union  companies,  will  be 
canceled.  The  effect  of  this  cooperation  is  that  improve- 
ments have  been  made;  and  many  classes  which  were 
once  unprofitable  at  any  rate  which  competition  would 
allow  the  companies  to  secure,  have  become  profitable 
even  at  lower  rates  —  a  happy  situation  for  the  insurance 
companies  as  well  as  for  the  public. 

Very  closely  connected  with  the  plan  of  providing  for 


DISCRIMINATION  AND  COOPERATION  219 

thorough  and  economical  inspection  is  the  fourth  object 
of  associated  effort,  the  study  of  fire  hazards  and  fire  pre- 
vention. While  it  is  perhaps  true  that  the  stock  fire 
insurance  companies  are  not  primarily  interested  in  redu- 
cing the  fire  loss,  competition  of  the  mill  mutuals  and  of 
the  preferred  class  companies  for  certain  classes  of  risks 
has  forced  the  companies  writing  all  classes  to  give  atten- 
tion to  the  study  of  hazards.  Companies  have  found  that 
with  many  classes  of  risks  rates  must  be  closely  adjusted 
to  hazards.  If  they  are  not,  the  good  mills  and  factories 
will  go  to  the  factory  mutuals,  and  the  better  risks  in 
other  classes  to  the  non-union,  preferred-risk  companies 
which  are  always  looking  for  profitable  business.  There- 
fore in  order  to  forestall  competition,  actual  or  latent,  the 
associated  companies  have  found  it  necessary  to  establish 
a  laboratory  for  the  study  of  the  hazard  of  new  processes, 
the  value  of  new  methods  of  fire  prevention,  and  like 
topics.  Here  again,  it  might  be  possible  for  one  company 
to  make  these  experiments;  but  again  we  may  be  sure 
that  one  company  acting  alone  would  not  attempt  it.  It 
is  to  the  interest  of  all  the  companies  doing  a  general 
agency  business  to  have  such  studies  made  of  hazards; 
therefore  the  companies  not  only  ought  to  be  allowed  to 
cooperate  for  this  purpose,  but  encouraged  to  do  so. 

The  last  object  which  the  companies  have  attempted 
to  secure  through  cooperation  is  a  reduction  of  losses 
caused  by  incendiaries.  Each  company  has  to  guard  it- 
self against  the  first  act  of  an  incendiary;  but  through 
cooperation  the  companies  can  protect  one  another  from 
further  loss  at  the  hand  of  the  same  incendiary.  Under 
the  system  as  carried  out  at  present,  whenever  a  company 
finds  out  or  suspects  that  a  loss  has  been  due  to  a  desire 
on  the  part  of  some  one  to  sell  out  to  the  insurance  com- 
pany at  a  fancy  price,  it  notifies  a  central  bureau  which 
sends  out  to  all  companies  a  list  of  all  persons  suspected 
of  incendiary  tendencies. 

Besides  the  effort  to  keep  track  of  incendiaries,  as  above 


220  YALE  READINGS  IN  INSURANCE 

described,  the  companies'  associations  seek  in  other  ways 
to  discourage  losses  due  to  moral  hazard.  Rewards  are 
offered  for  the  punishment  of  incendiaries,  suspected  crim- 
inals are  prosecuted,  and  in  other  ways  a  great  deal  has  been 
accomplished.  Since  such  work  is  for  the  good  of  all  the 
companies,  the  burden  of  expense  should  be  borne  by  all. 

What,  then,  is  our  conclusion  regarding  efforts  at  co- 
operation among  the  companies?  It  is  that  such  coopera- 
tion is  highly  desirable  from  every  point  of  view. 

This  conclusion  is  the  exact  opposite  of  that  reached 
by  the  legislatures  of  nearly  half  of  our  states;  twenty- 
three  legislatures  have  thought  that  it  was  detrimental  to 
the  interests  of  the  public  that  the  fire  insurance  companies 
should  be  allowed  to  cooperate,  particularly  in  the  matter 
of  rates  and  commissions.  It  was  in  1883  that  Michigan 
passed  the  first  of  the  so-called  "anti-compact"  laws; 
this  measure  provided  that  no  fire  insurance  company 
should  enter  into  an  agreement  with  another  company 
the  object  of  which  was  to  prevent  free  and  open  competi- 
tion between  it  and  other  companies.  Michigan's  action 
was  followed  by  Ohio  and  New  Hampshire  in  1885,  by 
Kansas,  Missouri,  Nebraska,  and  Texas  in  1889,  by  Georgia 
in  1891,  by  Iowa,  Alabama,  and  Wisconsin  in  1897  and  by 
others  until  at  present  (July,  1909),  as  has  been  stated, 
such  laws  are  in  force  in  twenty-three  of  the  states. 

There  have  been  a  number  of  motives  actuating  the 
state  legislatures  in  passing  such  laws.  The  ostensible 
reason  always  given  has  been  the  fear  of  a  fire  insurance 
trust  which  would  be  able  to  dictate  the  price  of  insurance, 
and  which,  having  this  power  over  rates,  would  raise  them. 
Admitting  for  the  moment  that  such  a  trust  is  possible, 
its  existence  would  doubtless  be  better  than  a  condition 
of  free  competition.  It  is  not  high  rates  in  fire  insurance 
which  cause  the  greatest  evils ;  the  rates  which  do  the  most 
injury  are  those  which  do  not  measure  the  hazard  of  loss. 
Not  even  the  demonstration  that  a  fire  insurance  trust 
is  possible  will  justify  anti-compact  laws. 


DISCRIMINATION  AND  COOPERATION  221 

But  there  cannot  be  a  fire  insurance  trust  which,  be- 
cause of  its  abiUty  to  dictate  prices,  is  able  to  secure 
unusual  profits  for  its  members.  In  order  to  have  a  com- 
bination with  power  to  dictate  prices  arbitrarily,  such  a 
combination  must  have  a  monopoly  of  some  kind.  The 
fire  insurance  combination,  or  union,  has  no  monopoly, 
unless  it  be  the  monopoly  of  experience;  and  this  is  the 
very  thing  which  a  compact  among  the  companies  makes 
the  common  property  of  any  one  who  wishes  to  enter  into 
the  business.  In  order  to  make  a  rating  compact  prac- 
ticable, there  must  be  printed  a  tariff  of  rates  upon  all 
risks  in  every  community.  It  is  true  that  the  union  com- 
panies make  a  pretense  at  keeping  these  printed  tariffs 
from  outsiders,  but  such  attempts  are  wholly  farcical;  the 
tariffs  are  printed,  they  are  placed  in  the  hands  of  a  dozen 
—  sometimes  hundreds  —  of  agents,  and  any  one  can  learn 
without  a  great  deal  of  trouble  the  rate  upon  any  risk. 
This  is  the  rate  which  the  well-established  companies  deem 
sufficient  for  the  risk;  and  thus  it  is  that  a  new  company 
without  experience  is  able  through  the  printed  schedule 
to  take  advantage  of  the  experience  of  the  older  com- 
panies. It  has  been  truly  said  that  instead  of  a  rate  union 
preventing  competition,  rather  is  it  the  nursing  bottle  for 
young  companies.  That  it  is  impossible  to  establish  a 
fire  insurance  association  or  union  endowed  with  danger- 
ous power  over  rates  ought  readily  to  be  recognized  from 
the  ease  with  which  new  companies  are  organized.  No 
business  is  easier  to  undertake  than  that  of  fire  insurance; 
no  expensive  plant  has  to  be  acquired  as  in  the  case  of 
manufacturing,  no  expensive  right  of  way  secured  as  for 
railroading;  in  most  of  the  states,  any  one  can  organize  a 
fire  insurance  company  and  begin  business  as  soon  as  a 
cash  capital  of  $100,000  has  been  raised.  This  fact  that 
companies  are  so  easily  organized  represents  a  very  effec- 
tive control  over  prices.  The  best-working  fire  insurance 
union  in  the  country  has  never  been  able  to  raise  the  price 
of  fire   indemnity  high  enough   to  recoup   conflagration 


222  YALE   READINGS  IN   INSURANCE 

losses.  If  the  compacts  cannot  enable  the  companies  to 
provide  for  the  conflagration  hazard,  it  seems  as  if  there 
were  little  ground  for  fearing  that  a  fire  insurance  trust 
will  exercise  undue  control  over  rates. 

There  is  reason  for  believing  that  agitation  against  the 
compacts  because  of  their  monopoly  feature  is  simply  a 
cover  of  other  motives  for  attacking  the  compacts.  Under 
conditions  of  free  competition  in  fire  insurance,  rates,  as 
we  have  seen,  are  demoralized;  but  this  is  a  desirable  state 
of  affairs  for  some  insurers.  In  the  first  place,  with  no 
compacts,  rates  will  be  a  matter  of  bargaining,  and  the 
shrewdest  bargainers  in  the  community  will  get  their  in- 
surance the  cheapest.  Competition  among  the  companies 
is  the  keenest  for  large  risks  such  as  are  found  in  the  manu- 
facturing and  mercantile  businesses;  and  the  men  in  charge 
of  these  large  business  enterprises  are  in  charge  because 
they  possess  greater  ability  than  do  their  smaller  competi- 
tors. The  situation,  then,  in  fire  insurance  with  no  com- 
pacts, is  fierce  competition  for  the  large  risks  on  the  part 
of  the  insurance  companies,  and  shrewd  bargaining  ability 
on  the  part  of  those  controlling  the  risks;  and  the  result 
is  low  rates  for  the  large  risks.  We  discover  here  the  rea- 
son why  large  manufacturers  and  large  owners  of  risks  are 
always  found  fomenting  anti-compact  legislation  directed 
at  fire  insurance  companies;  and,  to  a  considerable  extent, 
the  reason  why  that  legislation  has  spread  widely  over  the 
country. 

Perhaps  it  is  unnecessary,  in  view  of  what  has  been 
said,  to  describe  several  periods  in  our  history  during 
which  the  fire  insurance  companies  were  unable  to  co- 
operate. We  have  passed  through  several  such  periods. 
Tlie  years  1855  to  1865  were  years  in  which  the  companies 
could  not  get  together  on  rates.  There  existed  that  condi- 
tion of  free  competition  so  alluring  to  the  enemies  of  fire 
insurance  combinations;  and  what  was  the  result?  At  the 
end  of  1865,  forty-six  out  of  the  one  hundred  and  forty- 
five    companies   reporting    to    the    New   York    Insurance 


DISCRIMINATION   AND  COOPERATION  223 

Department  had  impaired  their  capitals  to  the  extent 
of  a  milhon  and  a  hah"  of  dollars;  in  other  words  the  stock- 
holders were  paying  for  the  privilege  of  furnishing  insur- 
ance. Of  course  such  a  situation  could  not  continue,  for 
losses  cannot  permanently  be  paid  out  of  capital.  The 
crisis  was  met  by  a  combination  among  the  companies. 
Supposing  such  a  combination  to  have  been  impossible 
through  uniform  action  of  all  the  states  and  the  life  and 
death  struggle  must  have  gone  on  between  the  companies 
until  only  a  few  were  left.  Then  the  difficulty  in  securing 
enough  insurance  would  have  sent  rates  up;  then,  as  rates 
went  up,  profits  would  have  increased,  new  capital  would 
have  been  attracted  to  the  business,  severe  competition 
would  have  ensued,  and  the  old  cycle  of  events  would 
have  been  repeated  once  more.  Such  a  disturbance  in 
business  conditions  would  have  been  a  severe  burden 
upon  industry. 

Finally  it  is  interesting  to  recall  the  nature  of  the  policy 
pursued  by  other  countries  m  regard  to  fire  insurance 
associations.  In  England  there  is  one  tariff  association 
of  practically  all  the  companies,  which  has  enjoyed  a  con- 
tinuous existence  since  1858;  this  association  determines 
the  rates  for  all  important  classes  of  risks,  and  so  well 
have  rates  been  adjusted  to  hazards  that  owners  have 
never  found  it  necessary  to  organize  mutual  companies. 
The  same  situation  is  found  in  the  other  European  coun- 
tries. In  none  are  the  associations  illegal,  and  in  all  they 
are  recognized  as  necessary  for  the  best  conduct  of  the 
business. 


CHAPTER  XII 

VALUED-POLICY   LAWS 
I' 

A  FIRE  insurance  policy,  in  case  of  a  total  loss  by  fire 
of  property  insured,  shall  be  held  and  considered  to  be  a 
liquidated  demand  against  the  company  for  the  full  amount 
of  such  policy;  provided,  that  the  provisions  of  this  article 
shall  not  apply  to  personal  property. 

ir 

At  the  beginning  of  the  present  century  a  religious  sect 
existed  in  the  East  Indies,  governed  by  a  creed  which 
made  assassination  for  gain  a  religious  duty,  a  holy  and 
honorable  profession.  This  sect  had  existed  for  over  a 
thousand  years,  and  for  ages  was  unmolested  by  the  native 
rulers  paying  taxes  for  the  privilege  of  practising  its 
bloody  rites  until  finally  suppressed  by  the  British  gov- 
ernment in  1834. 

Exactly  forty  years  after  the  thug  was  suppressed  in 
the  East  Indies,  he  was  reincarnated  under  his  modern 
name  in  the  good  State  of  Wisconsin  by  the  enactment 
of  a  statute,  since  known  as  the  valued-policy  law,  which 
declared  that  whenever  an  insured  building  should  be 
totally  destroyed  by  fire,  the  amount  of  insurance  in  force 
should  be  taken  as  conclusive  evidence  of  the  true  value 

»  Revised  Statutes  of  Texas,  Article  3089. 

2  By  A.  F.  Dean,  Assistant  Manager,  Western  Department  of  the 
Springfield  Fire  and  Marine  Insurance  Company.  Reprinted  from 
pages  103-111  of  "The  Rationale  of  Fire  Rates;"  J.  M.  Murphy. 
Chicago,  1901. 

224 


VALUED-POLICY  LAWS  225 

of  the  property,  and  the  true  amount  of  the  loss  or  damage, 
regardless  of  the  actual  value  of  the  property.  In  1879 
this  law  spread  into  Ohio,  Missouri,  and  Texas,  and  is  now 
in  force  in  twenty-one  states.^ 

The  law  changes  a  contract  to  make  good  the  actual 
loss  by  fire  into  a  plain  bet  (with  average  odds  of  one 
hundred  to  one  in  favor  of  the  assured)  that  his  property 
will  not  burn  within  a  stated  time.  With  such  odds,  a 
bet  on  almost  any  future  event  beyond  the  control  of 
either  party  would  find  many  takers;  but  when  a  man 
carries  the  keys  of  his  own  house  in  his  pocket,  and  the 
event  is  wholly  under  his  control,  it  is  not  surprising  that 
legalized  wagers  of  this  sort  should  come  to  be  popularly 
regarded  as  "a  cinch." 

In  any  event,  a  law  which  puts  it  in  the  power  of  the 
average  man  to  strike  a  bonanza  of  this  sort  with  a  lucifer 
match  must  occasionally  tempt  some  one  to  strike,  for 
"oft  the  sight  of  means  to  do  ill  deeds  makes  ill  deeds 
done." 

At  current  dwelling  rates,  if  one  policy-holder  out  of 
five  hundred  is  tempted  by  this  law  to  burn  his  property, 
it  doubles  the  cost  of  insurance  for  the  remaining  four 
hundred  and  ninety-nine  policy-holders;  if  only  one  man 
in  two  thousand  is  so  tempted,  it  increases  the  cost  25  per 
cent,  for  the  remaining  nineteen  hundred  and  nuiety-nine 
policy-holders. 

That  the  law  has  raised  the  aggregate  cost  of  fire  insur- 
ance to  the  American  people;  that  it  is  the  direct  cause 
of  an  untold  amount  of  arson,  perjury,  and  murder  — 
no  one  familiar  with  fire  statistics  can  for  an  instant  doubt. 
The  dangers  of  the  law  to  life,  property,  and  morals  have 
repeatedly  been  pointed  out  by  state  officials.     During 

>  At  the  present  time,  the  valued-policy  law  appears  upon  the  statute 
books  of  the  following  states:  Arkansas,  California,  Delaware,  Florida, 
Georpn^a,  Iowa,  Kansas,  Kentucky,  Minnesota,  Mississippi,  Missouri, 
Nebraska,  New  Hampshire,  Ohio,  Oklahoma,  Oregon,  South  Carolina, 
Texas,  Washington,  West  Virginia,  and  Wisconsin. 


226  YALE  READINGS  IN   INSURANCE 

the  past  year,  on  the  ground  that  it  offered  an  incentive 
to  crime,  the  law  was  vetoed  by  the  governors  of  Colorado, 
Nevada,  and  Utah,  and  the  governor  of  West  Virginia 
refused  his  signature.  In  his  last  annual  report,  the  in- 
surance commissioner  of  Ohio  published  statistics  showing 
the  increase  in  fire  losses  in  that  state  since  the  enact- 
ment of  the  law,  and  ends  with  the  following  comment: 

"I  have  no  hesitancy  in  believing  that  over-insm-ance, 
sanctioned  and  encouraged  by  the  valued-policy  law,  is 
the  cause  of  the  greater  portion  of  this  increased  fire  waste, 
and  that  this  unnecessary  waste  will  continue  and  grow 
worse  so  long  as  this  statute  remains  a  part  of  our  insurance 
code." 

The  state  insm-ance  commissioner  of  Michigan,  in  his 
last  annual  report,  condemns  the  law  in  language  equally 
strong,  and  estimates  the  losses  from  moral  hazard,  aris- 
ing from  over-insm"ance  in  his  state,  at  25  per  cent,  of 
the  aggregate  fire  waste;  in  other  words,  that  incendi- 
arism is  the  cause  of  one  fire  out  of  every  four. 

But  how  did  this  legislative  lunacy  known  as  the  valued- 
policy  law  come  into  being  in  an  enlightened  age  and  coun- 
try? Wliat  was  its  genesis?  Everything  must  have  a 
cause.  If  it  were  possible  to  go  back  through  the  mists 
of  antiquity,  it  would  doubtless  be  found  that  there  was 
some  apparently  logical  reason  for  the  birth  of  thuggism, 
some  fancied  wrong  to  be  righted. 

The  law  enacted  in  Wisconsin  in  1874,  and  since  that 
time  by  twenty  other  states,  was  originally  intended  to 
right  an  existing  wrong,  and  the  history  of  valued-policy 
legislation  throws  an  instructive  side-light  upon  the  other- 
wise unaccountable  antagonism  of  legislatures  to  the  indus- 
try of  fire  insurance  in  all  states  dominated  by  the  farmers' 
vote. 

Thirty  years  ago  farm  property  formed  a  much  larger 
proportion  of  our  aggregate  national  wealth  than  it  does 
to-day.  At  that  time  the  tremendous  growth  of  our  manu- 
facturing  and    transportation  facilities,  and  the  concen- 


VALUED-POLICY  LAWS  227 

tration  of  population  in  our  cities  was  just  beginning. 
The  fire  companies  were  then  deriving  a  steady  revenue 
from  the  insurance  of  farm  property,  which  as  a  class  was 
considered  doubly  desirable,  because  it  had  been  steadily 
profitable,  and  because  it  was  free  from  the  dangers  of 
sweeping  conflagrations  which  in  every  city  jeopardized 
the  entire  assets  of  a  company. 

Every  company  wrote  farm  business  freely  through  its 
local  agents,  under  the  same  liberal  conditions  as  other 
classes  of  property.  The  volume  of  farm  business  and 
its  exceptional  desirability  led  some  managerial  genius  to 
conceive  the  idea  that  he  could  largely  increase  the  pre- 
miums of  his  company  from  this  source  by  sending  out 
traveling  solicitors  through  the  country  districts,  after  the 
manner  of  the  lightning-rod,  chain-pump,  and  patent- 
churn  people.  As  these  solicitors  were  selected  for  their 
glibness  and  push,  rather  than  for  their  character  or  knowl- 
edge of  the  business,  and  as  neither  their  judgment  nor 
honesty  could  be  trusted,  the  plan  was  adopted  of  taking 
payment  in  notes  instead  of  cash.  An  elaborate  applica- 
tion containing  a  cut-throat  warranty  was  prepared,  under 
which  the  assured  surrendered  every  equitable  right,  and  be- 
came responsible  for  any  over-valuation  of  his  property ;  and 
to  make  assurance  doubly  sure  every  policy  contained  a 
printed  stipulation  that  the  company  should  be  liable  for 
only  three-fourths  of  any  loss  that  might  occur.  This 
plan  relieved  the  company  of  any  necessity  for  the  ser- 
vices of  local  agents,  selected  for  their  honesty  and  skill. 
There  was  no  cash  to  handle;  no  danger  of  defalcations, 
and  (with  a  policy  condition  which  compelled  the  assured 
to  carry  one-fourth  of  the  insurance  for  which  he  had 
paid)  no  danger  from  over-insurance.  Under  this  jug- 
handle  arrangement  it  became  possible  to  sell  fire  indem- 
nity, like  tinware,  by  pedling. 

The  farmer  is  generally  ready  to  purchase  anything  he 
can  pay  for  with  a  note,  and  as  "a  business  getter"  the 
plan   was   a    success.     Tn    a    few   years   the   agricultural 


228  YALE  READINGS  IN  INSURANCE 

regions  swarmed  with  traveling  solicitors  ready  to  sell  a 
farmer  a  patent  churn,  windmill,  stmnp-puller,  or  fire 
policy  with  the  same  glib  disregard  of  the  truth.  These 
tramp  solicitors  were,  as  a  rule,  ignorant,  unscrupulous 
adventurers.  They  were  paid  by  a  percentage  of  the  pre- 
miums, and  it  was,  of  course,  to  their  interest  to  make 
as  large  a  sale  of  indemnity  to  every  buyer  as  possible, 
regardless  of  his  actual  needs.  The  companies  themselves 
could  afford  to  be  indifferent  to  the  amount  of  insurance 
a  man  procured,  as  misrepresentations  in  application  could 
be  used  to  deny  liability,  and  in  any  event,  the  assured 
could  not  collect  more  than  three-fourths  of  his  actual 
loss.  In  time,  the  adjustment  of  losses  revealed  the  full 
iniquity  of  this  plan,  and  in  every  farming  community 
fire  insurance  came  to  be  regarded  as  a  swindle.  Of  the 
hundreds  of  fire  institutions  then  doing  business,  not 
over  four  or  five  at  most  were  implicated.  Nineteen  com- 
panies out  of  twenty  vainly  protested  at  the  buccaneering 
methods  of  these  so-called  farm  companies,  believing  they 
would  bring  the  entire  business  into  reproach  and  subject 
it  to  inimical  legislation.  These  apprehensions  were  well 
founded.  The  industry  of  fire  insurance  became  non  grata 
in  every  state  where  the  farmers  had  the  controlling  voice 
in  legislation,  and  the  entire  insurance  community  has 
been  made  to  suffer  ever  since  for  the  sins  of  a  few  unprin- 
cipled adventurers. 

The  American  farmer  to-day  is  the  hereditary  foeman 
of  fire  insurance;  he  makes  no  distinction  between  com- 
panies on  account  of  character,  record,  or  methods;  in 
the  words  of  a  popular  song,  "All  coons  look  alike"  to 
him;  the  few  companies  whose  solicitors  he  learned  to 
distrust  in  the  palmy  days  of  farm  insurance  are  typical 
of  the  whole  body  of  fire  underwriters.  In  his  ignorance 
of  the  facts,  the  readiest  remedy  that  occurred  to  the  agri- 
culturalist was  to  wipe  out  the  whole  iniquity  with  a  sweep- 
ing law  which  required  that  the  amount  of  insurance  should 
be  taken  as  the  real  value  and  measure  of  loss,  regardless 


VALUED-POLICY  LAWS  229 

of  policy  conditions  or  actual  loss.  The  offer  of  a  reward 
to  any  one  sharp  enough  to  swindle  an  insurance  company 
was  a  practical  application  of  the  maxim,  "Set  a  thief 
to  catch  a  thief";  but  in  resorting  to  this  crude  remedy 
the  farmers  forgot  to  consider  the  possible  consequences 
to  either  their  own  or  other  people's  interests. 

Probably  no  more  absurd  or  dangerous  means  was  ever 
devised  to  right  a  wrong,  and  the  farmers  themselves 
have  come  in  for  nmch  the  largest  share  of  the  evil  conse- 
quences of  their  own  hasty  and  ill-advised  action.  The 
valued-policy  law  has  cost  the  farmers  millions  of  dollars, 
to  say  nothing  of  other  people.  In  Wisconsin,  Ohio, 
Texas,  and  Missouri,  where  the  law  has  been  longest  in 
force,  farm  rates  to-day  are  about  double  what  they  were 
when  the  law  was  enacted.  At  that  time,  all  companies 
were  freely  writing  farm  risks  through  their  local  agents 
under  the  same  form  of  policy,  and  at  the  same  commis- 
sions that  prevailed  in  other  business.  Ask  any  agent 
to-day,  and  he  will  reply  that  few  or  none  of  his  companies 
will  insure  farm  property  at  any  price.  The  very  com- 
panies responsible  for  the  valued-policy  law  have  been 
forced  by  the  unprofitableness  of  the  business,  even  at 
present  high  rates,  to  discontinue  writing  farm  property 
in  states  where  the  law  exists.  These  companies  killed 
the  goose  that  laid  the  golden  egg,  by  creating  a  wide- 
spread moral  hazard  in  a  class  of  property  that  had  been 
notably  free  from  incendiary  hazard.  With  an  advance 
of  about  100  per  cent,  in  rates  in  valued-policy  states, 
farm  property  to-day  appears  on  the  prohibited  list  of 
nineteen  companies  out  of  twenty,  because  losses  have 
increased  even  more  than  rates. 

This  is  the  history  of  a  law  born  of  blind,  unreasoning 
greed  on  the  one  hand,  and  blind,  unreasoning  resentment 
on  the  other. 

These  conditions  are  the  results  of  open  coiwpetition.  If 
farm  business  had  been  under  control  of  tariff  associa- 
tions, the  united  intelligence  and  honesty  of  fire  under- 


230  YALE  READINGS  IN  INSURANCE 

writers  would  have  scotched  the  disreputable  schemes  that 
generated  an  equally  disreputable  law. 

In  states  where  the  law  has  not  already  been  enacted 
it  is  regularly  introduced  each  session  of  the  legislature 
and  voted  for  by  the  country  members.  If  asked  why, 
the  invariable  answer  is,  that  insurance  companies  sys- 
tematically encourage  people  to  buy  fire  indemnity  in 
excess  of  what  they  need;  in  other  words,  that  they  take 
money  for  which  they  render  no  equivalent.  This  is  the 
stereotyped  argument  urged  in  state  legislative  halls  year 
after  year.  To  say  nothing  of  the  poverty  of  invention 
that  can  devise  no  remedy  for  an  evil  except  to  create  a 
thousandfold  gi'eater  evil,  that  can  devise  no  penalty 
for  a  few  minor  evil-doers  except  to  create  thousands  of 
criminals,  whose  crime  has  been  held  under  every  civili- 
zation to  be  worthy  of  the  death  penalty,  what  shall  we 
say  to  the  legislative  inconsistency  that  imposes  a  penalty 
for  an  offense  which  is  common  to  every  walk  of  life,  even 
to  the  law-making  power  that  enacts  valued-policy  laws? 

IIV 

Since  the  last  report  made  to  the  Board,  a  large  number 
of  bills  adverse  to  insurance  interests  have  appeared  in 
several  state  legislatures  throughout  the  Union.  The 
Board  through  its  proper  committee  has  given  attention 
to  the  same  as  in  former  years,  and  circulars  and  letters 
have  been  addressed  to  companies  interested,  in  states 
where  obnoxious  legislation  has  been  proposed.  We  have 
in  most  cases  been  effectively  aided  by  the  influence  of  the 
companies  and  agents  local  to  the  respective  states,  as  well 
as  by  the  general,  state  and  special  agents  of  the  agency 
companies,  acting  either  individually  or  through  under- 
writers' associations.  If  not  in  a  majority,  certainly  in 
a  considerable  number  of  instances,  the  bills  have  been 
defeated  largely  by   the  judicious  and   timely  attention 

■  By  D.  A.  Heald.  Reprinted  from  pages  20-24  of  the  Presidential 
Address  before  the  National  Board  of  Fire  Underwriters,  July,  1886. 


VALUED-POLICY  LAWS 


231 


of  companies  and  their  representatives.  The  pernicious 
valued-pohcy  law  which,  since  its  enactment  in  Wiscon- 
sin, has  reappeared  each  winter  in  so  many  of  the  state 
legislatures,  received  in  New  Hampshire  during  the 
summer  of  1885  a  brand  of  disapproval  most  emphatic 
and  decisive  on  the  part  of  the  companies  doing  business 
in  that  state.  The  bill  was  to  be  deprecated  not  only  on 
account  of  its  valued  features,  but  because  it  provided  for 
a  revocation  of  the  authority  to  do  business  in  the  state, 
for  any  company  which  should  enter  into  any  compact 
with  other  companies,  for  the  purpose  of  governing  or 
controlling  rates  of  fire  insurance.  Having  passed  both 
branches  of  the  legislature,  the  bill  became  a  law  to  take 
effect  January  1,  1886,  by  the  signature  of  the  governor 
on  August  29,  1885,  and,  in  accordance  with  a  mutual 
understanding,  all  of  the  companies  —  fifty-eight  in  num- 
ber —  of  other  states,  and  all  of  the  companies  chartered 
by  foreign  governments  withdrew  from  the  state. 

Attention  is  here  invited  to  the  following  table  given 
by  Superintendent  Reinmund  of  the  Ohio  Insurance 
Department,  in  his  report  for  1885,  published  in  1886, 
in  which  he  recommends  a  repeal  of  the  valued-policy, 
or  so-called  "Howland  Law,"  in  that  state,  which  has 
been  in  force  since  July  1,  1880. 

"The  fire  insurance  business  of  the  joint-stock  com- 
panies, in  Ohio,  for  the  past  ten  years  shows  the  following 
results: 


Ratio  of  Loss 

Year 

Risks  Written 

Premiums 

Losses 

to  Each  $100 
of  Premiums 

1876 

$290,415,146 

$3,676,516 

$1,549,904 

42.20 

1877 

293,020,072 

3,231,629 

1,337,461 

41.40 

1878 

297,243,412 

3,337,812 

1,399,904 

41.90 

1879 

269,334,609 

2,772,868 

1,295,477 

46.70 

1880 

296,154,409 

3,127,331 

1,395,494 

44.60 

Totals 

$1,446,167,648 

$16,146,156 

$6,978,240 

43.20 

232 


YALE  READINGS  IN   INSURANCE 


HowLAND  Law,  July  1. 


Year 

Risks  Written 

Premiums 

Losses 

Ratio  of  Loss 
to  Each  $100 
of  Premiums 

1881 

1882 

1883 

1884 

1885 

$331,701,721 
369,872,828 
402,796,360 
495,554,856 
398,988,338 

$3,588,931 
4,058,627 
4,490,010 
4,676,370 
4,704,732 

$2,068,889 
2,356,851 
2,355,677 
3,507,848 
2,714,455 

57.60 
58.10 
52.50 
75.00 
58.80 

Totals 

$1,908,914,103 

$21,518,670 

$13,003,720 

60.40 

"From  the  above  it  will  be  seen,  that  the  average  ratio 
of  losses  to  premiums  in  Ohio  for  the  five  years  since  the 
passage  of  the  'Howland  Law'  has  increased  17  per  cent." 

Ratio  of  loss  to  each  $100  of  risk  written  1876  to  1880.  .48 
Ratio  of  loss  to  each  $100  of  risk  written  1881  to  1885.  .68 

Thus  the  destruction  of  property  by  fire  in  that  state 
has  increased  from  48  cents  on  every  $100  written  to  68 
cents,  an  increase  of  20  cents  for  Ohio,  while  the  increase 
for  the  same  period  throughout  the  whole  country  has 
been  from  54.14  to  58.36  or  only  4^%%  cents.  Ohio 
has  therefore  a  net  increase  of  15tV(t  cents  on  each 
$100  written,  in  her  losses  as  compared  with  the  entire 
country.  Here  is  a  loss  to  the  commonwealth  of  the 
state  of  over  $3,000,000  in  five  years  as  compared  with 
the  rest  of  the  country,  and  of  nearly  $4,000,000,  as  com- 
pared with  the  previous  five  years  in  her  own  state.  Whence 
this  increase?  We  must  look  to  some  disturbing  cause  at 
work  in  Ohio,  which  has  not  existed  in  other  states.  We 
need  not  go  far  for  the  cause.  The  silent  influence  of  the 
law,  overturning  the  fundamental  idea  of  fire  insurance 
based  upon  actual  indemnity  to  the  insured,  and  sub- 
stituting therefor  a  fixed  and  arbitrary  value  to  the  thing 
destroyed  irrespective  of  its  real  value,  is  amply  sufficient 
to  account  for  this  alarming  increase.  To  the  honest 
insurer  this  law  offers  no  sufficient  inducement  for  perjury 


VALUED-POLICY  LAWS 


233 


and  arson,  but  to  the  dishonest  it  is  too  often  a  command- 
ing incentive  to  crime,  and  in  these  figures  is  the  absolute, 
irrefutable  proof  of  its  terrible  influence.  These  three  to 
four  millions  is  the  price  paid  to  the  dishonest  minority 
of  Ohio  by  the  vast  majority  of  her  good  and  true  citizens, 
for  a  law  far  more  fatal  to  her  morals  than  it  is  or  ever 
can  be  to  her  material  wealth.  How  long  will  the  states- 
men of  Ohio  permit  this  law  to  disgrace  her  statute  book, 
demoralize  her  citizens  and  waste  her  wealth,  as  it  is  here 
proved  clearly  and  conclusively  to  have  done,  by  facts 
beyond  dispute. 

Wisconsin  is  the  only  other  state  in  which  a  similar 
law  has  been  in  force  for  a  length  of  time,  sufficient  for 
reliable  deductions.  The  increase  of  the  loss  ratio  in  that 
state  is  also  remarkable.  The  figures  from  the  official 
reports  of  the  Wisconsin  Insurance  Department  for  eight 
years  previous  to  the  decision  of  the  Supreme  Court  of 
the  state,  holding  the  law  constitutional,  and  the  eight 
years  succeeding  when  it  may  be  said  to  have  been  in 
full  force  and  influence,  will  show  the  following  results: 

Losses  for  Eight  Years  Prior  to  the  Enactment  op  the  Law. 


Year 

Amount  Written 

Premiums 

Losses 

Ratio  of  Loss 
to  Each  $100 
of  Prenoium 

1870 

$147,172,955 

$1,622,332 

$1,175,212 

72.44 

1871 

122,084,464 

1,436,197 

713,080 

49.65 

1872 

142,351,376 

1,910,677 

922,637 

48.29 

1873 

157,406,089 

2,174,931 

993,281 

45.67 

1874 

154,795,630 

2,271,059 

1,010,023 

44.00 

1875 

147,440,317 

2,110,034 

1,877,111 

*89.00 

1876...   . 

133,614,294 

1,798,428 

634,674 

34.00 

1877 

146,983,804 

1,645,110 

973,913 

59.00 

Totals 

$1,151,848,929 

$14,968,768 

$8,299,931 

55.44 

*  Loss  by  Oshkosh  fire  included;  the  amount  of  same  paid  by  com- 
panies being  stated  by  the  Wisconsin  Insurance  Superintendent  at 
$920,438. 


234 


YALE  READINGS  IN  INSURANCE 


Losses  Since  the  Law  Went  Into  Force. 


Year 

Amount  Written 

Premiums 

Losses 

Ratio  of  Loss 
to  Each  $100 
of  Premium 

1878 

$140,411,389 

$1,508:955 

$965,478 

64.00 

1879 

151,731,034 

1,589,472 

1,037,193 

64.00 

1880 

159,110,857 

1,766,528 

1,143,541 

61.50 

1881 

161,574,070 

1,997,317 

957,816 

47.92 

1882 

175,210,508 

2,238,463 

1,340,372 

59.00 

1883 

188,113,382 

2,525,690 

1,748,180 

69.00 

1884 

199,205,324 

2,683,737 

2,010,901 

74.90 

1885 

196,101,759 

2,838,815 

2,222,631 

78.30 

Totals 

$1,377,458,323 

$17,148,977 

$11,426,112 

66.62 

Ratio  of  losses  to  each  $100  of  risks  written,  for 
eight  years,  1870  to  1877    72 

Ratio  of  losses  to  each  $100  of  risks  written  for 
eight  years,  1878  to  1885    83 

Here  nearly  the  same  results  are  repeated  as  in  Ohio, 
The  first  period  of  eight  years  shows  a  ratio  of  loss  to 
premiums  of  55.44,  the  second  66.62,  an  increase  of  11.18 
—  with  this  alarming  feature  that  the  two  last  years  after 
adding  the  ratio  of  expenses  gave  results  for  1884  —  losses 
69  per  cent.,  expenses  33.38,  total  102.88,  or  a  net  loss  on 
the  business  of  the  entire  state  to  all  the  companies,  of 
2iVo  P^r  cent,  of  premiums.  In  1885,  losses  74.90,  ex- 
penses 35.82,  total  110.72,  a  net  loss  of  lOy^^.  How  long 
can  responsible  underwriting  stand  up  under  such  con- 
ditions? 

If  we  come  to  that  which  more  nearly  concerns  the  people 
of  the  state,  we  find  that  the  ratio  of  loss  to  $100  insui'ed, 
has  increased  from  72  cents  in  the  first  period  to  83  cents 
in  the  second  —  a  difference  of  11  cents  on  every  $100  in- 
sured in  the  state  during  that  time.  Here,  too,  is  shown 
a  cause  at  work  that  has  produced  greater  loss  by  61^0 
cents  on  each  $100  than  that  of  the  whole  country.  The 
conclusion  is  inevitable  that  61VV  cents  on  each  $100 
insured   is  the  contribution  made  by  the  honest  policy- 


VALUED-POLICY   LAWS  235 

holder  of  Wisconsin  to  the  gi-asping  cupidity  of  such  as 
have  taken  advantage  of  a  bad  law  at  the  expense  of  con- 
science and  integrity.  These  tables  are  here  placed  on 
record  without  further  comment,  as  a  verification  of  the 
prediction  of  intelligent  underwriters  as  to  the  effect  of 
valued-policy  laws,  and  the  results  exhibited  should  cer- 
tainly lead  to  their  unconditional  repeal  by  all  the  states 
where  they  now  exist. 

A  fair  presentation  of  the  self-evident  arguments  against 
such  laws,  and  a  clear  statement  of  the  evils  wrought  by 
them,  as  shown  by  the  sworn  reports  of  underwriters  doing 
business  in  such  states,  will,  we  venture  to  say,  lead  to 
their  repeal.  Business  cannot  be  transacted  safely  under 
such  laws.  The  honor,  integrity,  and  moral  welfare  of  the 
state  demand  their  repeal,  and  a  candid  and  truthful 
statement  of  facts  and  figures  on  our  part  will,  in  my 
judgment,  secure  this  most  desirable  object  at  an  early 
day. 

IVi 

The  valued-policy  feature  of  the  law  is  alleged  by  the 
companies  as  their  principal  grievance,  under  which,  they 
declare,  they  cannot  safely  and  profitably  do  business. 
Of  their  inability  to  do  business  successfully  for  themselves 
on  that  basis,  I  am  not  persuaded.  To  adapt  their  busi- 
ness to  the  new  situation  created  by  the  law  might,  and 
probably  would,  occasion  inconvenience,  expense,  and 
change  of  habit,  but  it  could  be  done.  I  am,  however, 
well  convinced  they  ought  not  be  compelled  to,  and  for 
solid  reasons,  apart  from  their  interest  or  inclination,  they 
should  not  be  permitted  to.  Nor  would  the  public  be  con- 
tent with  it.  Under  the  open  policy,  the  property  owner 
may  obtain  full  protection  against  loss.  Under  the  valued 
policy,  no  company  could  prudently  write  insurance  to  the 
full  value  of  the  insured  property.     A  margin  would  need  be 

'  Reprinted  from  pages  XXXVII-XLI  of  the  Thirty-First  Mass- 
achusetts Fire  and  Marine  Insurance  Report. 


236  YALE  READINGS  IN  INSURANCE 

left,  liberal  enough  to  cover  surely  any  excess  in  original 
valuation,  and  also  the  possible  deterioration  in  value 
within  the  insurance  term.  While  in  administration,  the 
valued  plan  might  tend,  in  some  degree,  to  abate  the  con- 
ceded mischief  of  over-insurance  (for  which  another  and 
better  remedy  should  be  found),  it  would,  as  surely,  create 
a  popular  complaint  of  under-insurance.  A  judgment 
entitled  to  respect,  if  not  conclusive,  has  already  been 
pronounced  upon  the  relative  merits  of  the  two  plans. 
With  free  and  equal  chance  of  competition  for  public  favor 
and  business  approval,  the  valued  fire  policy  has  yielded 
place  to  the  open  indemnity  form  everywhere. 

The  question  is  to  be  considered  in  its  relation  to  sound 
public  policy,  and  a  recurrence  to  the  essential  nature  of 
the  insurance  contract  should  be  helpful  to  a  just  opinion. 

An  eminent  authority  correctly  defines  insurance  as  "A 
contract  whereby  one,  for  a  consideration,  undertakes  to 
compensate  another  if  he  shall  suffer  loss.  ...  It  is  appli- 
cable to  every  form  of  loss.  .  .  .  Wherever  danger  is  appre- 
hended, or  protection  is  required,  it  holds  out  its  fostering 
hand  and  promises  indemnity.  This  principle  (indemnity) 
underlies  the  contract,  and  it  can  never,  without  violence 
to  its  essence  and  spirit,  be  made  by  the  assured  a  source 
of  profit,  its  sole  purpose  being  to  guarantee  against  loss 
or  damage." 

Legitimate  insurance  cannot  overpass  the  limit  of  com- 
pensation for  actual  loss.  A  contract  which  promises  more 
than  that  is,  as  to  the  excess,  a  naked  wager,  condemned 
by  law  and  hateful  to  good  morals,  and,  applied  to  insurance 
of  property  liable  to  destruction  by  the  machination  of  the 
assured  who  would  profit  by  it,  offensive  to  public  policy 
because  a  temptation  to  social  crime.  A  valued  policy 
which  over-insures  is  such  a  contract,  and  the  statute 
under  discussion  protects  it. 

This  principle  of  insurance,  as  indemnity,  is  recognized 
and  enforced  in  the  Massachusetts  standard  form  of  fire 
insurance  policy,  which  all  companies  are  required  by  law 


VALUED-POLICY   LAWS  237 

to  write,  in  those  clauses  of  the  policy  which  limit  the  lia- 
bility of  the  company  to  the  actual  value  of  the  property 
and  provide  that  the  amount  recoverable  "shall  be  esti- 
mated according  to  the  actual  value  of  the  property  at  the 
time  when  the  loss  or  damage  happens.'^ 

But,  the  advocate  may  argue,  the  valued  policy  is  a  con- 
tract of  indemnity  only.  It  simply  fixes  the  amount  by 
agreement  in  advance.  What  amount  is  indemnity  is  a  mat- 
ter of  estimate,  and  why  may  not  the  estimate  be  made  by 
appraisal  and  agreement  before,  as  well  as  by  adjustment 
after  the  loss?  The  answer  to  the  argument  is  not  diffi- 
cult. The  true  indemnity  is  the  injury  by  the  loss,  and 
that  is  measurable  only  by  the  value  of  the  lost  property 
when  the  loss  occurs.  Between  the  contract  and  the  loss, 
the  value  of  the  property  may  sensibly  diminish,  whereby 
the  moral  hazard  is  made  greater,  and  if  insured  for  full 
value  at  date  of  contract,  under  a  valued  policy  the  assured 
gets  profit  in  addition  to  indemnity.  To  estimate  value 
at  date  of  the  policy,  or  at  date  of  loss,  is  feasible,  because 
the  valuation  can  be  made  from  known  facts;  but  a 
reliable  valuation  of  what  property  will  be  worth  at  an 
uncertain  future  date  is  not  possible.  If  the  company  is 
to  be  bound  conclusively  by  the  policy  valuation,  however 
clear  the  error,  it  must,  before  issue  of  the  policy,  cause  a 
careful  and  competent  valuation  of  each  parcel  of  property 
it  insures;  and,  furthermore,  it  must  establish  a  system  of 
supervision  of  all  its  risks  of  that  class,  in  order  to  protect 
itself  by  cancelation  of  policies  should  the  property  de- 
preciate. The  burden  of  cost  incident  to  these  prudential 
measures,  and  chargeable  to  the  valued  policy,  would  fall 
upon  the  public. 

Companies  are  obliged  to  act  largely  in  the  negotiation 
of  insurance  tlirough  agents  other  than  their  immediate 
officers.  And  in  the  selection  of  such  agents  the  company  is 
not  always  able  to  obtain  the  services  of  wholly  trustworthy 
persons.  Yet  to  these  persons  would  be  confided  the  val- 
uation of  the  insured  property  and  the  amount  of  insurance 


238  YALE  READINGS  IN  INSURANCE 

based  on  that  valuation.  For  the  protection  of  the  people 
it  is  fit  and  of  legal  obligation  that  the  company  should  be 
held  liable  and  bound  by  certain  acts  of  these  agents  in 
their  insurance  transactions,  yet  that  liability  should  be 
imposed  no  farther  than  the  necessities  and  equity  of  the 
case.  But  under  the  valued-policy  law  the  company  is 
bound  by  the  agent's  valuation,  however  false  or  treach- 
erous, and  unless  corrupt  collusion  with  the  assured  can 
be  proven.  True,  the  statute  permits  the  policy  may  be 
voided  by  proof  of  fraud  in  which  the  assured  participates. 
But  such  actual  fraud  is  usually  extremely  difficult  and 
often  impossible  of  proof  and  this  law  tempts  to  its  com- 
mission. Where  the  over-valuation  is  the  fault  of  the 
agent,  from  his  incapacity,  neglect,  or  corrupt  yielding 
to  the  temptation  of  a  larger  reward  from  the  transaction, 
the  law  refuses  a  remedy  and  enforces  the  injustice.  Surely 
that  cannot  be  good  legislation  which  incites  to  wrong 
and  shelters  it,  and  impairs  the  customary  freedom  of 
private  commerce,  unless  justified  by  the  prevention  of 
some  graver  injustice  not  curable  by  less  objectionable 
means. 

The  valued  clause  is  defended  on  the  ground  that  as  a 
matter  of  equity  the  company  should  be  liable  for  the  sum 
of  insurance  it  is  paid  a  premium  upon.  There  can  be, 
however,  no  lawful  equity  between  gamesters.  Com- 
panies may  be  willing  to  gamble  with  the  owner  or  other 
person  upon  the  chances  that  a  piece  of  property  will  or 
will  not  burn,  —  and  that  is  essentially  what  a  policy  of 
insurance  becomes  when  it  ceases  to  be  a  contract  of  in- 
demnity. But  the  state  should  not  lend  its  authority  to 
enforce  a  contract  repugnant  to  public  morals,  however 
willingly  entered  into  by  the  equally  culpable  parties  to 
it.  Our  courts  hold  that  a  contract  of  insurance  made 
with  a  person  who  has  no  interest  in  the  property  is  a 
wager  and  void  in  law.  Wliy,  for  like  reason,  should  not 
a  contract  which  insures  for  an  amount  more  than  the 
insurable  interest  be  equally  condemned  as  a  wager  and 


VALUED-POLICY  LAWS  239 

illegal?  If  a  man  insures  his  property  for  more  than  it 
is  worth,  he  does  so,  not  to  protect  himself  from  a  possible 
injury,  but  for  the  gambling  chance  of  a  possible  profit. 
If,  under  those  circumstances,  the  law  assures  that  he 
shall  realize  the  profit  if  the  property  burns,  does  not  the 
law  tempt  him  to  destroy  it?  A  contract  for  a  considera- 
tion to  pay  the  assured  the  amount  of  damage  he  may 
suffer  is  legitimate  insurance,  whence  arise  rights  the  law 
will  protect.  But  a  contract  to  pay  more  than  the  damage, 
violates  the  wholesome  law  of  both  private  and  social 
morality,  and  the  parties  who  make  it  acquire  no  rights 
which  the  civil  law  should  respect  or  honest  men  sym- 
pathize with.  There  are  insurance  companies  willing  to 
gamble  with  this  sort;  and  with  the  valued  policy  protect- 
ing such  transactions  with  its  legal  shield,  legitimate  in- 
surance would  suffer  from  the  unworthy  competition. 

The  other  reason  urged  in  the  support  of  the  justice 
and  expediency  of  the  law,  is  that  the  companies  un- 
fairly and  vexatiously  dispute  the  settlement  of  losses 
when  the  amount  payable  is  subject  to  adjustment. 
This  assumption  of  fact  is  not  verified,  and  the  argument 
sought  to  be  built  upon  it  must  fall  for  want  of  foundation. 
My  observation  is  that  the  companies,  conscious  of  their 
disadvantage  in  litigation  and  sensitive  to  the  popular 
prejudice,  injurious  to  their  patronage,  which  such  contro- 
versies are  likely  to  excite,  submit  to  claims  they  might 
in  good  faith,  and  ought,  in  justice  to  themselves  and  the 
public,  to  resist.  From  solf-interest,  if  no  worthier  im- 
pulse, as  a  rule  with  extremely  rare  exceptions,  they  lib- 
erally perform  their  obligations.  No  reason  is  given,  or 
suggests  itself,  why  a  party  dissatisfied  with  the  proposed 
adjustment  of  his  loss  under  an  insurance  contract,  should 
not  be  remitted  for  a  redress  of  his  grievance,  if  he  has  a 
real  one,  to  the  established  tribunals  of  justice.  What  is 
there  singular  in  the  nature  of  the  contract,  or  the  rights 
and  obligations  incident  to  it,  that  should  distinguish  it, 
as  respects  the  legal  rights  and  remedies  of  parties  to  it, 


240  YALE  READINGS  IN  INSURANCE 

from  other  contracts  which  men  make  in  ordinary  business 
intercourse?  This  law  appUes  solely  to  insurance  upon 
buildings  and  real  estate,  and  to  cases  of  total  loss.  In  a 
dispute  as  to  value  in  such  a  case  the  assured  has  an  equal, 
if  not  superior,  advantage  in  the  contention,  from  the 
friendliness  of  the  tribunal  he  may  resort  to,  and  his 
knowledge  and  ability  to  prove  value.  If  he  wants  but 
justice  he  is  sure  of  that,  and  often  gets  more,  in  the  courts. 
While  recognizing  the  function  of  government  to  protect 
the  weak  from  the  oppression  of  the  strong,  I  perceive  no 
circumstance  in  the  case  under  discussion  for  the  extraor- 
dinary intervention  of  that  power. 

The  conclusions  to  which  these  considerations  lead  are: 
(1)  that  the  valued-policy  law  violates  the  essential  prin- 
ciple of  the  insurance  contract,  a  principle  it  is  most  pru- 
dent to  cleave  to ;  (2)  that  it  protects  no  endangered  rights 
since  the  protection  of  the  courts  is  ample  for  the  purposes 
of  justice;  (3)  that  its  tendency  is  to  promote  dishonesty 
and  crime,  the  burden  of  which  the  public  must  endure. 


CHAPTER  XIII 

THE    CONFLAGRATION   HAZARD  * 

It  did  not  need  the  San  Francisco  fire  to  call  to  the 
attention  of  insurance  men  the  importance  of  the  subject 
of  the  conflagration  hazard ;  it  was  a  vital  question  already, 
in  fact  it  had  been  only  a  few  months  before  that  an  elab- 
orate report  on  the  conflagration  hazard  of  San  Francisco 
had  been  issued  by  the  National  Board  of  Fire  Under- 
writers, being  one  of  a  series  on  the  large  cities  of  the 
country.  But  to  the  insured  the  conflagration  hazard 
was  a  very  vague  idea,  not  definite  enough  to  prevent 
him  from  grumbling  at  paying  premiums  that  were  larger 
than  what  were  needed  barely  to  pay  ordinary  losses. 
It  seems  an  opportune  time  to  discuss  the  subject  of  the 
conflagration  hazard  —  what  the  companies  may  reason- 
ably do,  and  what  the  insured  may  do  to  safeguard  his 
rights. 

The  rate  in  fire  insurance  is  designed  to  cover,  first, 
the  fire  hazard,  second,  the  expense  of  doing  the  business, 
and  third,  the  profit.  The  fire  hazard  is  of  two  kinds, 
first,  the  hazard  of  ordinary  fires  in  which  one  or  a  few 
buildings  are  burned,  second,  the  conflagration  hazard. 
The  two  things  are  practically  distinct  in  spite  of  the 
difficulty  of  drawing  the  line  between  them.  If  the  con- 
flagration hazard  were  eliminated  not  only  would  a  large 
part  of  the  premium  be  cut  out,  but  the  business  of  fu'e 

1  By  A.  W.  Whitney,  Professsor  of  Mathematics  in  the  University 
of  CaHfornia.  Reprinted  from  pages  42-50  of  a  "  Report  of  the  Special 
Committee  of  the  Board  of  Trustees  of  the  Chamber  of  Commerce  of 
San  Francisco,  1906." 

241 


242  YALE  READINGS  IN  INSURANCE 

insurance  would  be  one  of  great  steadiness.  For  with  a 
multitude  of  risks  the  fluctuations  would  be  relatively 
small  and  would  be  due  mainly  to  general  conditions  that 
affect  all  business  in  much  the  same  way.  It  would  then 
be  unnecessary  for  companies  to  hold  large  surpluses. 
Such,  for  instance,  would  be  the  condition  of  a  company 
which  wrote  business  only  in  the  country. 

In  spite  of  the  fact  that  fire  insurance  is  usually  a  pri- 
vate enterprise  there  is  no  more  fundamental  fact  than 
that  the  companies  stand  simply  as  agents  of  the  insured. 
That  is,  instead  of  the  company  insuring  its  policy-holders, 
the  policy-holders  really  insure  each  other,  and  the  com- 
pany simply  manages  the  details  of  the  transaction.  In 
insurance  there  are  no  values  created,  they  are  only  dis- 
tributed, and  whatever  the  company  distributes  must  be 
collected. 

There  could  be  no  insurance  if  there  were  not  a  large 
number  of  the  insured.  There  must  be  a  large  enough 
number  of  the  insured  to  furnish  an  average  that  will  be 
free  from  large  fluctuations  year  by  year.  For  ordinary 
fires  this  may  be  obtained  in  a  small  section  of  the  country 
and  even  in  a  single  city.  For  instance,  if  there  were  no 
danger  of  sweeping  fires  a  company  might  very  safely 
write  business  in  San  Francisco  alone. 

So  much  for  the  ordinary  hazard,  but  the  conflagration 
hazard  is  of  an  entirely  different  character.  Here  the 
inhabitants  of  no  one  city  could  constitute  the  insurers,  for 
a  conflagration  might  sweep  them  all  down.  The  insurers 
must  be  taken  to  be  the  inhabitants  of  many  cities,  as 
many  in  fact  as  can  be  found  for  which  the  conflagration 
hazard  is  nearly  the  same.  But  still  the  average  is  not 
obtained,  for  even  in  all  the  large  cities  of  the  country 
together,  conflagrations  do  not  occur  in  any  regular  way 
year  by  year.  It  is  necessary,  therefore,  to  take  not  any 
one  year  but  a  long  series  of  years  in  order  to  obtain  the 
necessary  average  without  which  there  can  be  no  real 
insurance.     But  even  then  the  average  is  far  from  stable; 


THE  CONFLAGRATION   HAZARD  243 

the  San  Francisco  conflagration  in  three  days  did  more 
damage  than  all  the  other  large  conflagrations  in  this 
country  for  the  last  forty  years.  The  only  conclusion 
then  is  that  it  is  impossible  to  have  any  such  perfect 
insurance  against  conflagrations  as  against  ordinary 
fires.  Insurance  is  a  wonderful  institution,  but  there  are 
limitations  to  its  usefulness. 

These  considerations  have  a  practical  bearing.  The 
part  of  the  premium  that  is  collected  to  meet  the  hazard 
of  ordinary  fires  is  expended  during  the  year,  the  year 
being  in  general  sufficient  to  furnish  an  average,  the  com- 
pany being  required  to  hold  as  a  liability  the  part  of  the 
premium  that  is  still  unearned.  The  part  of  the  pre- 
mium, however,  that  is  designed  to  meet  the  conflagi'ation 
hazard  will  not  in  general  be  expended  during  a  single 
year,  but  must  be  kept  perhaps  for  many  years  till  the 
occasion  arises  for  its  use.  This  fund  is  called  the  sur- 
plus, but  very  unfortunately;  it  should  be  called  the  con- 
flagration reserve  and  should  be  treated  as  a  liability, 
just  as  is  the  reinsurance  reserve.  Surplus  is  something 
"over";  this  is  not  "over,"  it  is  held  for  a  definite  purpose 
and  hence  is  a  strict  liability.  This  is  not  a  quibble  over 
names,  it  is  an  attempt  to  demonstrate  the  accountability 
of  a  company  as  regards  its  surplus,  the  surplus  being  in 
reality  contributions  of  the  policy-holders  against  con- 
flagration. 

Admitted  then  to  be  a  liability,  what  should  be  its 
amount?  There  are  two  methods  conceivable  for  its 
detei-mination,  the  retrospective  and  the  prospective 
method,  just  as  in  life  insurance.  The  retrospective  method 
analyzes  the  premiums  into  a  charge  for  ordinary  fires 
and  a  charge  for  conflagi'ations;  this  would  be  very 
good  in  order  to  ascertain  what  the  annual  increase  of 
the  surplus  should  be.  But  the  prospective  method  gives 
the  real  criterion  of  its  size.  The  "average"  failing  to 
exist  in  any  reasonable  time,  the  size  of  the  conflagration 
reserve  cannot  be  based  upon  what  is  necessary  to  meet 


244  YALE  READINGS  IN  INSURANCE 

the  ''average"  conflagration,  but  instead  must  be  based 
on  what  is  necessary  reasonably  to  meet  a  "worst"  con- 
flagration, that  is,  the  size  of  the  required  surplus  shall  be 
determined  by  the  amount  of  the  aggregate  risks  that  are 
exposed  to  a  single  conflagration. 

To  summarize  then,  surplus  should  be  treated  as  a 
liability  and  its  amount  determined  by  a  reference  to  the 
aggregate  risks  exposed  to  a  single  conflagration.  A 
company's  business  then  in  a  single  city  must  be  limited 
not  necessarily  to  exactly  the  amount  of  its  surplus,  for 
practically  there  is  not  enough  insurance  to  be  had  to 
make  this  possible,  but  it  should  have  some  definite  ratio 
to  its  surplus.  But  how  is  a  new  company  to  get  a  sur- 
plus? In  either  of  two  ways,  start  small  and  grow  big, 
or  else  put  up  the  surplus  in  the  beginning.  And  here  is 
the  function  of  the  stock  company  rather  than  the  mutual 
company.  The  insurance  principle  proper  breaks  down 
when  it  comes  to  dealing  with  the  conflagration  hazard  and 
requires  a  boost  from  something  else,  namely,  private  cap- 
ital that  is  willing  to  assume  risk  for  the  sake  of  gain. 
Pure  insurance,  only  where  there  is  a  proper  average,  may 
be  entirely  mutual  as  life  insurance  and  fire  insurance  in 
the  case  of  well  scattered  risks. 

A  new  company  then  which  desires  to  write  business 
exposed  to  a  conflagration  hazard  must  put  up  a  surplus. 
As  the  business  develops  and  the  surplus  grows,  the 
company  may  take  on  a  growing  amount  of  city  business. 
If  the  company  should  desire  to  write  less  city  business 
at  any  time  or  to  retire  altogether,  part  or  all  of  the  sur- 
plus would  be  freed  from  its  character  as  a  liability  and 
would  be  at  the  disposal  of  the  company. 

The  result  arrived  at  is  no  strange  thing.  It  is  nothing 
but  what  has  occurred  to  every  thoughtful  person  who  has 
known  the  insurance  situation  following  a  conflagration. 
It  is  simply  an  insistence  upon  some  commensurateness 
between  the  resources  of  a  company  and  the  amount  at 
risk  in  a  region  subject  to  a  single  conflagration,  an  attempt, 


THE  CONFLAGRATION  HAZARD  245 

therefore,  to  prevent  companies  with  a  capital  and  surplus 
of  $250,000,  but  with  an  energetic  agent,  from  assuming 
the  conflagration  risk  that  belongs  to  a  company  of  ten 
times  that  size;  namely,  in  this  case  the  companies  that 
are  now  able  to  pay  only  30  to  60  per  cent. 

You  may  say,  leave  such  companies  to  perish  of  their 
own  egregious  intemperateness;  that  would  do  very  well 
if  it  were  the  company  only  that  suffered,  but  the  greatest 
sufferers  are  the  policy-holders.  There  is,  to  be  sure,  the 
eventual  action  of  the  law  of  the  survival  of  the  fittest, 
and  if  insurers  were  intelligent  enough  and  well-informed 
enough  this  would  be  better  than  legislation. 

Before  you  go  into  a  theater  it  would  be  well  if  you 
were  able  yourself  to  examine  into  the  safety  of  the  build- 
ing; since  that  is  out  of  the  question  the  next  best  thing 
is  a  building  law. 

It  is  almost  equally  difficult  personally  to  know  the  fit- 
ness of  an  insurance  company  to  assume  a  risk.  In  view 
of  the  impracticability  of  doing  this,  the  next  best  thing 
is  a  law  regarding  liability.  There  is  a  law  regarding 
liability  for  the  unearned  current  premium,  there  ought 
to  be  a  law  regarding  liability  for  unearned  conflagration 
accumulations. 

Now  it  is  only  fair  when  funds  to  meet  a  potential  liabil- 
ity have  been  provided  in  a  ])rescribcd  manner  that  this 
measure  of  the  potential  liability  should  be  taken  after 
the  loss  has  occurred  as  a  measure  of  the  actual  liability. 
That  is,  if  a  company  has  maintained  its  conflagration 
reserve,  its  liability  in  case  a  conflagration  has  occurred 
should  be  limited  to  this  amount.  This  being  a  part  of 
the  contract  introduces  no  element  of  unfairness;  the 
insured,  instc^ad  of  buying  insurance  with  theoretically 
unlimited  liability,  but  practically  most  decidedly  limited 
because  of  the  well-known  expense  and  delay  of  litigation 
and  the  undesirableness  of  receiverships,  buys  insurance 
in  which  liability  is  definitely  and  legally  limited;  but  the 
protection  is  standardized. 


246  YALE  READINGS  IN   INSURANCE 

This  again  is  not  a  matter  of  far-away  theoretical  inter- 
est; it  is  vitally  connected  with  the  actual  situation  in 
San  Francisco.  No  fact  has  been  more  striking  than  that 
'practically  the  liability  of  the  companies  has  been  limited. 
In  spite  of  the  fact  that  companies  could  be  brought  into 
the  courts  and  compelled  to  pay  their  claims  in  full  or  be 
driven  into  acknowledged  insolvency,  in  spite  of  the  fact 
that  there  is  a  state  law  regarding  stockholders'  unlimited 
liability,  it  is  a  most  notable  fact  that  but  three  companies 
are  in  the  hands  of  receivers,  that  more  than  half  the 
companies  have  been  able  to  settle  their  claims  at  less 
than  their  face  value  with  few  lawsuits,  that  companies 
which  have  paid  but  50  and  60  per  cent,  are  likely  to  be 
able  to  close  out  their  claims  and  yet  preserve  their  plants. 
This  is  a  state  of  actually  limited  liability.  Which  is  the 
better,  theoretically  unhmited  liability  with  such  an  attend- 
ant host  of  disagreeable  features  as  we  have  had  in  San 
Francisco,  amounting  as  a  matter  of  fact  to  limited  Habil- 
ity,  or  a  legally  limited  liability  with  standardized  pro- 
tection? 

Nothing  is  gained  by  taking  the  pound  of  flesh.  To 
drive  a  company  into  insolvency  and  thereby  destroy  its 
plant  is  to  kill  the  goose  that  laid  the  golden  eggs.  Set 
a  reasonable  standard  of  protection  against  conflagration, 
then  if  this  has  been  observed  absolve  the  company  from 
further  liability.  The  company  will  then  have  saved  its 
plant  and  may  immediately  go  on  in  business  on  whatever 
scale  its  remaning  funds  or  fund  to  be  put  up  by  its  stock- 
holders will  warrant. 

The  details  of  such  a  plan  can  manifestly  not  be  given 
here,  but  it  is  perfectly  possible  to  work  them  out  in  an 
entirely  practical,  consistent  way.  To  sum  up,  however, 
the  advantages  of  such  a  plan  are,  first,  no  company  could 
write  an  inordinate  amount  of  business  and  so  nullify  its 
capacity  to  indemnify;  second,  there  would  be  better,  and 
not  only  better,  but  standartlized,  protection  against 
conflagration;  third,  the  business  of  fire  insurance  with 


THE  CONFLAGRATION  HAZARD  247 

this  element  of  uncertainty  removed  would  be  far  more 
attractive  to  capital  and  would  appeal  to  a  better  class 
of  investors. 

This,  by  the  way,  might  apparently  seem  to  be  dictated 
by  a  thought  of  what  would  be  best  for  the  companies. 
Not  so  at  all.  The  fundamentally  mutual  character  of 
insurance  is  so  dominant  that  the  company  is  almost  lost 
sight  of.  As  a  matter  of  fact  what  is  best  for  the  insured 
and  what  is  best  for  the  company  are  in  any  large  matters 
identical. 

One  point  more;  it  may  be  said  that  a  law  of  the  kind 
proposed  would  work  a  hardship  upon  the  small  com- 
pany. No  great  hardship;  a  small  company  may  do  as 
much  country  business  as  it  pleases,  and  it  may  take  a 
share  of  city  business  proportionate  to  its  size.  To  attempt 
to  minimize  the  advantage  of  size  in  fire  insurance  is 
ridiculous.  Nowhere  else  is  it  more  true  that  "to  him 
that  hath  shall  be  given";  it  reads:  "to  him  that  hath  a 
large  surplus  shall  be  given  much  city  business  and  from 
him  that  hath  not  shall  be  taken  away  (by  reinsuring  it, 
if  a  company  can  be  found  to  take  it)  most  of  that  which 
ian  over-energetic  agent  has  written." 

And  now  let  us  come  back  to  the  immediately  practical 
business  as  it  is  to-day.  Massachusetts,  which  has  always 
been  the  leader  in  intelligent  insurance  legislation,  had  a 
law  a  few  years  ago  limiting  the  amount  of  risk  that  a 
company  might  assume  in  any  one  of  certain  districts  in 
Boston.  This  law  was  repealed.  It  was  presumably 
found  that  with  the  law  in  operation  it  was  impossible  to 
obtain  enough  insurance,  the  reason  of  course  being  tliat 
while  the  legally  prescribed  limit  would  have  yielded  as 
much  insurance  as  before,  as  a  matter  of  fact  the  conserv- 
ative companies  would  not  write  up  to  the  limit  allowed. 
There  was,  therefore,  a  deficiency  of,  to  be  sure,  a  very 
poor  type  of  insurance,  namely,  one  that  gave  practically 
no  protection  against  conflagrations,  but  iKJvertheless  it 
gave  fairly  good  protection  in  the  case  of  ordinary  losses, 


248  YALE  READINGS  IN   INSURANCE 

and  for  this  purpose,  in  the  lack  of  anything  better,  could 
not  be  spared. 

This,  then,  apparently  disposes  of  the  practical  possi- 
bility of  placing  a  limit  upon  city  risk.  Yes,  absolutely, 
in  large  cities  if  the  supply  of  insurance  is  to  be  always 
limited  to  what  is  available  now.  But  the  one  hope  of 
bettering  insurance  protection  against  conflagrations  is 
the  enlistment  of  more  insurance  capital,  and  the  one 
way  of  doing  this  is  to  make  the  business  more  attractive. 
A  limited  liability  law  would  do  this.  As  a  matter  of 
fact  the  safety-fund  laws  of  various  states,  New  York 
among  the  number,  are  exactly  of  this  nature,  but  if 
the  liabiHty  is  to  be  limited,  the  simplest,  most  natural 
limit  seems  to  be  had  by  a  reference  to  the  aggregate 
amount  exposed  to  a  single  conflagration  as  outlined 
above. 

Still,  as  a  matter  of  fact,  whether  liability  shoukl  be 
limited  to  the  surplus,  the  surplus  and  capital,  or  to  the 
surplus,  capital,  and  the  excess  of  the  unearned  premium 
reserve  over  the  actual  cost  of  reinsuring  the  outstanding 
risks  is  a  matter  of  detail;  the  important  thing  is  to  grant 
some  form  of  limited  liability  in  case  of  conflagration  that 
will  save  the  plant;  but  it  should  be  granted  only  if  there 
is  the  proper  commensurateness  between  the  conflagration 
risk  and  the  company's  assets. 

Is  it  worth  while  to  think  of  conflagrations  or  do  they 
come  so  seldom  that  we  may  go  on  in  sweet  oblivion?  Is 
the  insurance  business  to  be  organized  with  the  possibility 
of  a  conflagration  clearly  recognized  or  is  it  to  be  based  on 
ordinary  loss,  and  Heaven  help  us  if  we  have  a  conflagra- 
tion? A  conflagration  may  be  a  theory  in  New  York,  but 
it  is  a  fact  in  San  Francisco.  The  conflagration  hazard, 
basing  it  upon  the  three  large  conflagrations  of  the  last 
fifty  years,  excluding  the  San  Francisco  conflagration, 
and  spreading  it  over  the  twenty  largest  cities  of  the 
United  States,  can  be  demonstrated  to  have  been  (on  the 
assumption  that  the  rates  have  been  adequate),  on  mer- 


THE  CONFLAGRATION  HAZARD  249 

cantile  stocks  half  as  large  as  the  ordinary  hazard,  and 
on  so-called  fire-proof  buildings  several  times  as  great  as 
the  ordinary  hazard.  This  does  not  appear  to  be  a  haz- 
ard that  should  be  neglected. 


CHAPTER  XIV 

FIRE   INSURANCE   ENGINEERING^ 

Fire  insurance  engineering  is  the  application  of  the 
principles  of  engineering  to  prevention  of  fire,  to  protection 
against  fire,  and  to  arrangement  of  property  so  that  the 
least  possible  damage  will  result  when  fire  occurs. 

As  now  practised  it  is  the  outcome  of  many  years  of 
evolution  from  the  need  of  fire  insurance  companies, 
but  principally  during  the  last  twenty  years.  Although 
there  are  many  capable  men  in  the  business  who  are  not 
graduates  of  any  college  or  technical  school,  a  large  and 
increasing  percentage  is  composed  of  graduates,  usually 
of  the  technical  schools,  because  the  studies  there  deal 
directly  with  the  application  of  the  principles  of  engineer- 
ing and  chemistry  inseparably  connected  with  this  work. 

All  over  the  United  States  and  Canada,  to  speak  of  the 
territory  to  which  most  of  the  American  companies  con- 
fine their  operations,  the  companies  maintain  organiza- 
tions for  estimating  rates,  or  for  inspection  to  improve 
risks,  work  which  requires  the  examination  of  insurable 
property  of  every  sort  by  men  in  their  employ  who  make 
this  a  specialty.  Entrance  to  the  profession  is  usually 
effected  by  becoming  an  inspector  of  this  sort  at  the  rate 
of  $50  to  $75  a  month,  more  often  the  latter  to  a  scientific 
school  graduate,  well  recommended.  In  two  years  the 
average  man  can  earn  $1200  a  year.  After  that  the  sal- 
aries vary   too  much  to  give  any  satisfactory  average; 

»  By  Frederick  C.  Moore,  Superintendent,  Special  Risk  Department 
of  the  Hartford  Fire  Insurance  Company,  Hartford.  An  address  de- 
livered before  the  insurance  class  in  Yale  University,  May,  1909. 

250 


FIRE  INSURANCE  ENGINEERING  251 

with  equal  loyalty  and  hard  work,  much  depends  on  the 
good  judgment,  tact,  and  initiative  of  the  individual,  as 
in  other  enterprises.  Salaries  of  inspectors  commonly  do 
not  exceed  $2500  a  year,  except  when  they  have  some  share 
in  the  executive  management.  From  these  inspectors 
are  selected  those  who  fill  positions  at  the  heads  of  the 
various  bureaus  and  of  the  special  departments  main- 
tained by  large  companies,  which  pay  larger  salaries. 

Although  the  money  reward  is  not  large  for  the  aver- 
age as  compared  to  those  of  individuals  in  successful  inde- 
pendent mercantile  pursuits,  and  although  the  vocation 
carries  with  it  the  disadvantage  of  absence  from  home 
during  the  greater  part  of  the  time,  and  the  necessity  for 
starting  at  short  notice  so  that  the  plans  of  ordinary  home 
life  are  almost  impossible,  the  employment  is  very  secure, 
continuous,  interesting,  and  in  most  associations  very 
pleasant,  so  that  few  leave  the  business. 

The  novice  spends  three  months  or  more  under  the 
instruction  of  a  trained  inspector  in  the  field.  Ordinarily 
at  the  end  of  a  novitiate  of  that  length  he  is  able  to  travel 
alone  to  do  the  simpler  work,  but  it  is  a  year  before  his 
judgment  is  trained  so  that  he  is  of  much  value,  and  it  is 
much  longer  before  his  experience  is  sufficiently  varied  to 
enable  him  to  work  easily  and  with  confidence. 

As  there  are  always  more  applicants  for  inspector's 
positions  than  places,  good  material  for  selection  is  as- 
sured, and  the  choice  being  governed  in  most  cases  by 
relative  merit,  the  result  is  a  body  of  men  of  good  character, 
energy,  and  intelligence.  Each  is  spurred  on  to  greater 
effort  by  the  example  of  some  associate  with  a  better 
record,  by  the  hope  of  a  more  speedy  increase  in  salary, 
but  particularly  by  the  possibihty,  ever  present  and 
never  forgotten,  of  being  selected  by  some  fire  insurance 
company,  large  manufacturing  corporation,  or  large  insur- 
ance agency  or  brokerage  firm  for  a  position  of  greater 
responsibility  and  higher  salary.  All  the  manufacturing 
and  mercantile  risks  which  are  insured  are  visited  by  such 


252  YALE  READINGS  IN  INSURANCE 

men,  who  are  privileged  by  their  mission  to  examine  every 
part  of  the  property  in  detail. 

To  illustrate  the  training  which  makes  insurance  engi- 
neers, let  us  follow  the  general  work  of  an  inspector  in  the 
employ  of  one  of  the  large  inspection  bureaus  which  make 
a  business  of  reporting  the  condition  of  insured  property 
to  the  fire  insurance  companies. 

He  is  given  a  list  of  properties  of  every  sort  to  inspect, 
grouped  systematically  according  to  locations,  and  works 
alone.  Generally  speaking,  his  absence  seldom  exceeds  two 
weeks.  If  he  goes  to  Pittsburg,  his  list  may  contain  an 
open-hearth  steel  plant,  rolling-mill,  crucible  steel  plant, 
rail  mill,  distillery,  window-glass  factory,  plate  glass  fac- 
tory, pressed  glass  plant,  rubber  mill,  department  store, 
car  works,  modern  warehouse  for  general  merchandise, 
packing-house,  harness  leather  tannery  and  others.  This 
same  interesting  variety  of  subjects  is  characteristic 
of  the  work  in  most  places,  and  is  a  never-failing  source  of 
interest  to  one  who  is  a  student  of  industrial  processes. 
To  the  examination  of  each  of  these  he  applies  the 
same  principles,  prompted  to  prevent  oversight  by  a 
printed  question  blank.  It  is  necessary  to  consider  the 
character  and  influence  of  neighboring  property  which 
may  expose  the  risk  in  question  to  the  danger  of  a  fire 
without,  the  construction,  the  occupancy,  and  the  materials 
and  processes  it  entails,  particularly  with  reference  to  the 
hazards  thereof,  care  and  cleanliness,  the  private  and  the 
public  protection,  and  any  special  conditions  influencing 
the  fire  risk,  all  in  detail.  Usually  he  draws  a  ground 
plan  at  the  first  inspection  and  this  is  carefully  corrected 
at  each  subsequent  inspection.  With  a  good  plan  and 
report  a  company  can  decide  what  line  it  will  carry. 

It  requires  from  a  few  hours  to  several  days  to  make  an 
inspection,  according  to  the  size  of  the  risk.  It  will 
therefore  be  evident  that  the  number  of  risks  inspected 
in  a  year  is  not  necessarily  a  comparative  measure  of  value, 
because  the  skilled  man  will  be  given  more  of  the  long, 


FIRE  INSURANCE  ENGINEERING  253 

difficult  inspections.  For  an  entire  bureau  force  they  will 
not  average  one  per  working  day  per  man;  in  fact,  the 
actual  performance  of  one  of  the  largest  for  last  year  is  .73. 

A  good  inspector  is  essentially  a  good  reporter.  Those 
who  receive  the  reports  prefer  to  draw  their  own  conclu- 
sions, which  are  often  very  different  from  those  of  the 
inspector,  whose  criterion  is  based  on  physical  conditions, 
while  that  of  the  underwriter  is  probable  profit  and  loss, 
and  includes  prominently  the  question  of  rate,  which  the 
inspector  ordinarily  does  not  know,  and  is  usually  specifi- 
cally instructed  to  disregard  in  order  that  any  opinions, 
which,  in  addition  to  the  facts,  he  is  expected  to  express, 
may  not  be  influenced  by  the  knowledge  of  the  rate. 

The  expense  of  getting  this  information  has  resulted  in 
the  organization  of  the  inspection  bureaus  already  briefly 
mentioned,  which  have  from  twenty  to  fifty  companies 
as  members,  each  of  which  gets  all  the  information.  This 
concentration  of  effort  has  resulted  in  the  employment  of 
a  corps  of  inspectors  large  enough  to  have  one  inspector 
in  each  district,  so  that  when  the  need  arises  for  an  imme- 
diate examination  of  any  risk  the  nearest  man  will  be 
only  a  short  distance  away  and  can  be  sent  at  once.  In 
a  day  or  two  thereafter  the  report  is  in  the  office  and  in 
another  two  days  can  be  in  the  hands  of  the  members. 
It  costs  from  4  to  5  per  cent,  of  the  premiums  of  the  risks 
inspected  to  support  a  large  bureau.  The  companies 
believe  it  pays  to  spend  this  money,  even  though  there  is 
only  negative  proof,  since  no  one  can  tell  what  the  result 
would  be  if  inspections  were  abolished.  They  certainly 
prevent  fires,  cause  arrangement  of  risks  which  diminish 
the  average  loss  and  forewarn  the  companies  of  conditions 
which  lead  to  loss.  These  inspections  are  of  value  to 
every  fire  insurance  company,  because  they  cause  the  im- 
provement of  the  risk  whatever  companies  may  write  it. 
No  less  important  are  the  benefits  conferred  upon  the 
owner  of  the  plant.  In  most  cases  he  desires  to  know 
what  to  do  to  protect  his  business  from  the  disastrous 


254  YALE  READINGS  IN  INSURANCE 

effects  of  fire,  which  not  only  causes  immediate  material 
loss,  but  also  serious  consequential  loss  to  his  established 
trade,  which  comi)etitors  win  away  while  he  is  rebuilding 
his  factory.  Consequently  he  welcomes  a  thorough  inspec- 
tion, and  is  glad  to  consider  resulting  suggestions.  Not- 
withstanding the  predominance  of  owners  of  this  type 
there  are  enough  of  the  sort  who  meet  suggestions  with 
the  comment,  "I  suppose  you  are  obliged  to  find  fault  to 
hold  your  job,"  a  bit  of  cynicism  quite  unwarranted,  and 
which  the  inspector  has  heard  a  hundred  times  before,  so 
that  its  one-time  wit  is  quite  lost.  It  is  noteworthy  that 
inspectors  are  as  a  class  very  earnest  and  honest  in  their 
work  and  that  they  have  enthusiastic  professional  appre- 
ciation for  a  risk  which  is  above  criticism. 

The  same  inspectors  who  carry  on  the  work  previously 
described  also  report  on  every  important  fire  immediately 
after  its  occurrence.  Thus  we  have  full  information  of 
conditions  before  and  after  the  fire,  and  the  compai-ison 
leads  to  improved  conditions  not  only  in  the  risk  affected, 
but  also  in  other  risks  where  similar  conditions  exist. 

Most  of  these  men  are  members  of  an  organization  known 
as  the  National  Fire  Protection  Association,  formed  "to 
promote  the  science  and  improve  the  methods  of  fire  pro- 
tection and  prevention;  to  obtain  and  circulate  informa- 
tion on  these  subjects,  and  to  secure  the  cooperation  of 
its  members  in  establishing  proper  safeguards  against 
loss  of  life  and  property  by  fire,"  the  publications  of 
which  may  be  obtained  by  any  one  who  is  interested  in 
the  subject  by  becoming  a  subscribing  member  at  an  annual 
fee  of  $5. 

This  association  holds  annual  meetings  which  are  at- 
tended by  large  numbers  of  the  field  men,  and  at  which  are 
presented  the  rules,  specifications,  or  other  findings  of 
special  committees  among  which  such  work  is  divided. 
Therefore,  anything  promulgated  by  the  association  has 
been  subjected  to  the  criticism  of  men  from  all  parts  of 
the  field  in  an  open  discussion.    The  result  is  standards 


FIRE  INSURANCE  ENGINEERING  255 

for  the  construction,  installation,  and  use  of  different 
devices  and  materials  for  fire  prevention  and  fire  protec- 
tion and  the  elaboration  of  methods  of  fire  insurance 
engineering  generally.  These  rules  and  methods  are  the 
guides  to  the  engineer  in  his  work  with  the  property  owner, 
who  will,  we  trust,  recognize  that  the  basis  for  the  sug- 
gested improvements  to  his  risk  are  principles  which  are 
the  outgrowth  of  the  consensus  of  opinion  at  these  rep- 
resentative meetings  and  not  simply  the  result  of  local 
experience. 

In  order  that  the  relative  merit  of  these  devices  and 
materials  may  be  definitely  ascertained  from  tests  under 
conditions  which  admit  of  accurate  comparisons,  the 
companies  maintain  the  Underwriters'  Laboratories  at 
Chicago,  where  tests  and  investigations  are  carried  on  with 
the  cooperation  and  advice  of  committees  of  the  National 
Fire  Protection  Association,  in  consideration  of  a  fee 
paid  by  the  applicant  for  the  test,  which  covers  part  of 
the  expense  of  the  work.  The  benefit  to  the  applicant, 
who  is  practically  always  the  owner  of  something  which 
he  expects  to  sell  to  the  public,  is  that  if  his  product  is 
successful  under  test  he  receives  the  approval  of  the 
laboratories,  which  gives  the  article  a  better  position  in 
the  eyes  of  buyers.  To  insure  that  the  entire  product 
will  be  the  same  as  the  samples  approved  by  test,  a  plan 
to  inspect  the  product  at  the  factory  has  been  put  into 
effect,  the  theory  being  that  a  particular  label  attached 
thereto  will  be  conclusive  guarantee  of  the  proper  stand- 
ard of  excellence. 

The  tests  have  been  made  principally  upon  electrical 
devices  and  materials,  fire-extinguishers,  hose,  fire-doors, 
and  shutters,  automatic  sprinklers,  and  allied  devices, 
lighting  and  heating  devices,  and  structural  materials  of 
various  sorts,  carried  on  along  the  lines  of  physical  lab- 
oratory testing,  but  always  with  an  eye  to  practical  con- 
ditions. For  instance,  a  fire-door  or  shutter  is  set  in  a 
brick  panel  forming  one  side  of  a  gas  furnace  capable  of 


256  YALE  READINGS  IN  INSURANCE 

generating  a  temperature,  gradually  raised  to  1800*^  to  2000° 
F.,  about  1000°  being  reached  in  the  first  five  minutes. 
After  an  hour's  exposure  the  side  of  the  furnace  carrying 
the  shutter  is  slid  rapidly  to  one  side  into  the  open  yard, 
and  a  hose  stream  directed  against  the  heated  side,  repro- 
ducing the  extreme  conditions  of  actual  use.  The  defects 
of  the  shutter  are  certain  to  show.  The  thoroughness  of 
this  test  is  indicative  of  the  methods  used  generally. 

The  information  developed  by  field  work  and  by  the 
laboratory  tests  is  being  applied  to  bring  about  better 
construction  particularly,  which  is  probably  the  most 
important  condition  in  limiting  fire  loss. 

One  of  the  most  serious  handicaps  to  the  successful 
operation  of  fire  insurance  companies  is  the  spread  of  fire 
fioni  one  building  to  another,  developing  in  the  extreme 
into  conflagrations  such  as  those  from  which  the  coimtry 
has  severely  suffered  in  the  last  few  years,  and  in  which 
fire-proof  buildings,  of  construction  so  good  that  the  funda- 
mental parts  of  them  withstood  the  fire,  offered  no  real 
barrier.  This  is  largely  due  to  the  absence  of  protection 
for  the  wall  openings,  and  to  educate  the  public  to  the 
need  for  such  protection  is  one  of  the  most  urgent  duties 
of  the  insurance  engineer.  Obviously,  all  buildings  can- 
not be  fire-proof,  but  even  on  brick  buildings  of  ordinary 
construction  the  general  protection  of  the  exposed  win- 
dows would  result  in  enormous  decrease  in  the  exposure 
losses,  which,  leaving  conflagrations  out  of  the  question, 
are  very  heavy  in  the  aggregate.  By  some  fallacious 
reasoning  it  has  been  the  unfortunate  custom  to  omit 
protection  on  windows  which  face  streets,  but  ordinary 
streets  offer  no  effective  stop  to  flames.  By  giving  the 
fire  department  time  to  work  before  a  fire  can  reach  more 
fuel,  the  protection  of  wall  openings  will  do  more  than  any 
other  structural  change  to  prevent  conflagrations. 

A  study  of  this  question  of  exposure  leads  an  American 
to  envy  the  condition  in  France,  which  is  such  that  a 
Napoleonic  law  can  exist  that  compels  an  owner  to  pay 


FIRE  INSURANCE  ENGINEERING  257 

damages  caused  to  neighboring  property  by  fire  origina- 
ting on  his  premises,  and  to  admire  the  construction  that 
makes  it  possible  for  insurance  companies  to  insure  that 
liability  for  a  merely  nominal  rate. 

Another  axiom  of  insurance  engineering  is  that  open- 
ings through  the  floors  of  a  building  should  be  closed.  A 
fire  causes  an  ascending  draft  of  heated  air,  and  flame 
naturally  follows  that  course;  furthermore,  the  natural 
draft  in  buildings  is  ordinarily  upward.  An  open 
stairway  or  elevator  shaft  becomes  at  once  a  rapid  and 
easy  path  for  fire,  often  taking  a  fire  from  the  basement 
into  the  comparatively  inaccessible  upper  floors  before 
the  fire  department  can  get  fairly  at  work.  With  all 
such  openings  closed  there  is  time  to  head  it  off.  In 
constructing  modern  factory  buildings  this  principle  is 
observed  by  providing  a  brick  tower  or  towers  for  stairs, 
elevators,  and  power  transmission,  with  fire-doors  at  the 
entrances. 

The  character  of  buildings  is  improving  under  the  influ- 
ence of  the  bonus  which  insurance  companies  put  upon 
good  construction  in  the  shape  of  low  rates,  but  many  are 
built  in  which  the  construction  is  so  light  that  the  benefits 
of  cut-offs  at  floors  can  not  be  fully  realized.  The  ques- 
tion of  the  saving  in  insurance  which  applies  to  the  value 
of  contents  as  well  as  to  the  building,  and  for  the  life  of 
the  building,  is  not  given  sufficient  consideration  in  plan- 
ning. Many  a  building  could  have  been  far  better  built 
and  would  have  been  just  as  good  an  investment  if  the 
owner  and  architect  had  discussed  the  matter  beforehand 
with  a  competent  insurance  engineer,  as  some  of  them 
always  do. 

In  addition  to  points  of  construction,  the  safe  arrange- 
ment of  the  hazards  of  manufacture  claims  an  important 
share  of  the  engineer's  efforts.  Although  the  owner  knows 
the  processes  of  his  business  far  better  than  any  outsider, 
yet  he  frequently  fails  to  realize  the  hazards  of  it.  It  is 
natural  that  in  this  respect  he  should  not  be  as  well  able 


258  YALE  READINGS   IN   INSURANCE 

to  pass  judgment  as  a  man  who  sees  those  same  hazards 
in  a  hundred  other  places  also,  and  whose  business  it  is 
to  weigh  them  and  safeguard  against  them.  It  is  a 
noticeable  fact  that  the  owner  usually  optimistically 
believes  that  he  has  a  better  risk  than  most  others  and 
that  his  risk  will  not  burn;  an  honest  opinion  which  is  the 
result  of  years  of  acquaintance  with  every  nook  and  cor- 
ner of  it,  but  which  blinds  him  to  the  real  dangers.  As  a 
rule,  however,  he  is  willing  enough  to  consider  such  changes, 
accompanied  as  they  are  by  convincing  examples,  and 
bringing  with  them  a  material  reduction  in  the  insur- 
ance premium. 

The  cotton-mill  presents  a  fine  example  of  what  the 
separation  of  the  principal  hazards  can  do  for  a  type. 
At  first  there  was  no  attempt  to  do  this,  and  fires  caused 
by  the  openers  and  lappers,  which  are  the  machines  which 
tear  the  raw  cotton  apart  and  prepare  it  for  carding,  burned 
entire  mills  and  consequently  cotton-mills  came  to  be 
considered  as  highly  hazardous.  Now,  a  modern  cotton- 
mill  is  considered  a  good  risk  and  when  protected  with 
automatic  sprinklers,  one  of  the  very  best  of  any  sort, 
because,  although  these  fires  frequently  occur,  the  machines 
which  cause  them  are  in  a  section  of  the  building  by  them- 
selves, separated  by  two  walls  and  two  fire-doors  from 
all  other  parts.  Consider  carefully  the  money  significance 
of  this  arrangement.  If  the  picker  hazard  were  in  the 
main  mill,  the  entire  insurance  would  be  paid  for  at  the 
high  rate  of  that  hazard,  but  cut  off  as  it  is  now  the  high 
rate  applies  only  to  the  value  in  the  picker  house.  In  a 
mill  without  sprinklers,  suppose  15  per  cent,  of  the  insur- 
able value  to  be  in  the  picker  house,  to  which  a  rate  of 
$1.50  applies  and  the  other  85  per  cent,  to  be  in  the  mill 
on  which  the  rate  is  50  cents,  then  the  separation  of  those 
hazards  is  saving  the  owner  of  that  mill  85  cents  per  $100 
of  insurance  per  year,  indefinitely,  or  $1700  yearly  on 
$200,000  insurance,  an  example  not  in  the  least  exagger- 
ated of  what  this  study  of  conditions  by  the  insurance 


FIRE  INSURANCE  ENGINEERING  259 

engineer  is  doing  for  the  owner  every  day,  and  any  owner 
can  obtain  the  judgment  of  a  skilled  man  for  the  asking 
from  a  company  which  maintains  one  on  its  staff,  with 
resulting  benefits  of  the  sort  quoted,  to  say  nothing  of  the 
added  security  which  the  improvement  gives  to  his  business. 

The  study  of  processes  with  a  view  to  separating  the 
hazardous  ones  so  that  they  can  not  endanger  the  other 
parts  of  the  risk,  and  the  reduction  of  the  value  in  these 
hazardous  places  to  the  lowest  possible  amount  so  that 
the  high  rates  will  have  the  least  effect  upon  the  average 
rate,  is  of  absorbing  interest  to  the  engineer  and  of  direct 
benefit  to  the  assured,  and  much  ingenuity  is  displayed 
in  the  solution  of  such  problems.  Every  industry  and 
business  is  capable  of  profiting  by  this  kind  of  an  analysis, 
and  it  is  the  exception  to  find  a  property  which  has  not 
had  careful  consideration  on  this  basis,  the  rate  of  pre- 
mimn  on  which  can  not  be  reduced  by  improvements  at  a 
cost  that  will  be  a  good  investment  for  the  owner.  In 
addition  to  the  engineering  information  required,  the  spe- 
cialist in  the  employ  of  a  company  brings  to  a  considera- 
tion of  this  sort  a  knowledge  of  insurance  rules  and 
contracts  that  is  of  value. 

As  a  result  of  work  of  this  kind  the  companies  now 
recognize  that  a  modern  risk  of  almost  any  sort  can  be  so 
much  improved  that  the  histoiy  of  risks  of  similar  kind  in 
the  past  is  not  a  fair  basis  of  judgment,  and  they  consider 
risks  on  their  individual  merits. 

In  the  detection  and  safeguarding  of  hazards  technical 
books  and  papers  give  very  little  information,  except 
those  written  by  insurance  men,  but  there  is  an  increasing 
number  of  these  latter,  which  are  put  before  the  public 
from  time  to  time  and  have  good  educational  value.  In- 
surance engineers  are  continually  finding  unsuspected 
hazards  of  new  processes  or  new  machines,  which  arc 
consequently  reduced  or  removed  with  the  cooperation 
of  the  proprietors,  which  has  already  been  of  great  benefit. 

It  remains  for  the  engineer  to  plan  the  most  practical 


260  YALE  READINGS  IN   INSURANCE 

means  for  fire  protection  after  other  considerations  are 
finislied,  to  tlie  end  tliat  fires  may  be  extinguished.  This 
attention  is  not  confined  solely  to  the  individual  risks, 
but  is  bestowed  upon  the  fire  departments  and  the  water 
supply  and  distribution  of  cities  as  well.  For  many  years 
inspectors  employed  by  insurance  interests  have  regularly 
visited  the  cities  and  the  larger  towns,  carefully  examining 
fire  departments  and  the  conditions  under  which  they 
work,  making  suggestions  for  the  improvement  of  this 
service.  For  several  years  a  more  complete  engineering 
organization  has  been  in  operation,  under  which  a  party 
of  engineers,  comprising  experts  in  the  subject  of  water 
supply,  fire  departments,  and  construction,  visit  a  city 
together  and  stay  there  till  they  have  carefully  examined 
it,  reporting  upon  the  degree  of  exposure  to  conflagra- 
tion, and  the  ability  of  the  water  supply  and  fire  depart- 
ment to  cope  with  local  conditions,  including  in  the  report 
the  remedies  which  they  deem  advisable,  with  which  the 
officials  of  the  municipality  are  made  acquainted.  The 
protection  of  individual  risks  receives  the  equally  careful 
consideration  of  other  men  in  the  employ  of  bureaus  or 
companies.  The  best  of  advice  is  to  be  had  for  the  ask- 
ing by  municipality  or  private  owner. 

Although  fh-e  insurance  engineering  has  done  and  is 
doing  much  to  prevent  loss  by  fire  in  this  country,  some 
idea  of  how  much  there  is  to  be  done  may  be  gained  from 
a  comparison  with  the  low  loss  ratio  in  Europe  where  rates 
are  so  low  that  automatic  sprinklers  offer  so  little  chance 
for  further  reduction  that  it  is  very  hard  to  sell  them. 
We  quote  a  loss  per  capita  of  12  cents  in  Italy,  49  cents 
in  Germany,  and  an  average  loss  per  capita  in  Austria, 
Denmark,  France,  Germany,  Italy,  and  Switzerland,  of 
33  cents,  as  compared  to  a  loss  in  the  United  States,  in 
1908,  of  $3.02. 

There  are  several  reasons  for  the  low  loss  ratio,  the 
principal  one  being  the  absence  of  wood  in  construction, 
and  another  the  smaller  number  of  fires.    The  first  reason 


FIRE  INSURANCE  ENGINEERING  261 

is  easy  to  understand,  because  except  in  Norway,  Sweden, 
and  Russia,  the  centuries  of  civilized  occupancy  have  used 
up  the  timber  so  that  within  the  life  of  present  buildings 
it  has  been  cheaper  to  build  of  stone,  brick,  tile,  and  other 
incombustible  material.  There  is  a  very  interesting 
consular  report,  printed  in  1892  by  the  United  States 
government,  entitled  "Fire  and  Building  Regulations  in 
Foreign  Countries,"  containing  the  answers  to  a  set  of 
questions  on  these  subjects  from  consuls  all  over  the 
world,  that  explains  much.  One  may  refer  therein  to  the 
cities  in  the  British  Isles  and  on  the  Continent,  except 
the  countries  already  mentioned,  and  find  that  there  are 
practically  no  wooden  buildings  and  that  such  are  forbid- 
den to  be  built,  and  this  means  that  floors  and  staircases 
are  incomlDustible  as  well  as  walls.  The  only  use  of  wood 
that  is  noticeable  is  in  the  framing  of  the  roofs  in  some 
localities.  This  plainly  teaches  us  that  in  good  construc- 
tion lies  the  greatest  single  safeguard  against  excessive  loss 
by  fire.  Contrast  San  Francisco,  a  wooden  city,  simply 
wrenched  by  earthquake,  half  destroyed  by  fire,  with  Mes- 
sina, a  city  of  masonry,  leveled  to  the  ground,  but  unburned. 

Certainly  the  fire  protection  of  foreign  cities  is  not  the 
reason  for  their  safety.  In  Rome,  a  city  of  427,000  at 
that  time,  the  department  put  out  the  fires  with  buckets 
and  fire-extinguishers  chiefly.  They  had  hand  engines 
for  use  where  the  water  pressure  was  unusually  low,  and 
for  cases  of  great  emergency  one  steam  fire-engine,  but 
the  last  time  it  was  used  it  was  over  two  hours  before 
it  could  be  put  into  condition  to  draw  water.  Imagine 
Buffalo  or  Baltimore  in  that  condition. 

There  is  one  consolation  in  the  impending  depletion  of 
our  forests,  that  it  may  force  the  adoption  of  fire-proof 
construction,  and  so  give  back  in  saving  from  fire  loss  the 
amount  lost  in  forest  value.  There  are  signs  that  the 
high  price  of  timber  and  the  difficulty  of  getting  it  have 
already  started  tliLs  movcmc^nt. 

The  other  reason,  fewer  fires,  is  not  so  easy  to  under- 


262  YALE  READINGS  IN   INSURANCE 

stand.  Hartford,  a  city  of  about  100,000,  had  300  still 
alarms  and  147  bell  alarms  last  year,  representing  actual 
fires.  At  the  time  of  the  consular  report,  Rouen,  France, 
about  the  same  size,  had  29  fires  in  one  year;  Roubaix 
(114,000),  the  same;  Rhcims  (105,000)  47,  the  average 
being  less  in  Spain  and  Italy.  London,  4,250,000  popula- 
tion, reported  2892  fires;  the  same  ratio  per  capita  as 
Hartford  would  have  called  for  14,500  fires.  Porta  Fayal, 
poi)ulation  6790,  a  stone  city,  no  fires  for  five  years; 
Asuncion,  Paraguay,  25,000  population,  brick  and  stone 
buildings,  no  fire  loss  for  seven  years;  Parimaribo,  Dutch 
Guiana,  28,000  population,  all  buildings  wooden,  no 
serious  fire  for  forty-five  years,  and  only  two  alarms  for 
seven  years,  each  a  small  native  hut.  The  almost  uni- 
versal use  of  buildings  of  fire-proof  materials  no  doubt 
accounts  for  some  of  the  decrease  in  these  foreign  coun- 
tries, but  there  must  be  other  stronger  reasons,  perhaps  a 
slower  pace,  older  civilization,  the  inherited  instinct  of  cen- 
turies when  fire  insurance  was  non-existent  and  fire  loss  was 
irreparable,  or  a  milder  climate  and  less  heating  apparatus. 
Broadly  speaking,  the  salvation  of  this  coimtry  in  respect 
of  fire  loss  lies  in  the  education  of  the  public,  beginning 
in  an  elementary  way  with  the  children,  to  which  fire 
insurance  engineering  can  contribute  a  highly  important 
part.  When  the  American  people  understand  thoroughly 
that  there  are  many  lives  and  over  $200,000,000  of  money 
lost  every  year  from  this  cause,  surely  the  response  will 
be  effective  and  we  shall  ultimately  cease  to  blush  for  the 
comparison  with  foreign  countries.  Although  there  has 
never  been  any  attempt  to  make  instruction  of  this  sort  a 
part  of  the  education  of  the  young  until  very  recently, 
through  insurance  engineering  the  insurance  companies 
are  unreservedly  giving  the  public  the  best  advice  to  aid 
in  decreasing  this  drain  of  men  and  material.  May  the 
time  hasten  when  the  people  will  realize  their  responsibil- 
ity and  make  free  use  of  the  benefits  so  freely  offered, 
for  the  sake  of  the  general  welfare  of  the  country. 


CHAPTER  XV 

FIRE   PROTECTION   WITH   AUTOMATIC   SPRINKLERS^ 

An  automatic  sprinkler  is  a  water  valve,  held  closed  by 
the  use  of  solder  fusing  at  a  low  temperature,  which  is 
intended  to  open  from  the  melting  of  the  solder  by  the 
heat  of  a  fire  in  order  to  distribute  water  as  a  fine  spray 
to  extinguish  the  fire.  Similar  devices  have  been  known 
for  many  years,  but  no  practical  use  was  made  of  the  prin- 
ciple until  the  early  '80s,  and  most  of  the  development  has 
been  in  the  last  twenty  years. 

Sprinklers  are  ordinarily  installed  eight  to  ten  feet  apart, 
in  water  pipes  of  graduated  sizes  from  |  inch  to  6  inch 
diameter,  attached  to  the  ceilings  at  regular  distances  all 
through  the  buildings  to  be  protected.  The  piping  does 
not  disfigure  the  rooms,  being  placed  symmetrically  with 
prominent  parts  of  the  framing.  After  a  short  time  it 
ceases  to  attract  the  attention  of  those  who  know  it  is 
there,  and  the  casual  visitor  seldom  notices  it  at  all,  par- 
ticularly as  the  pipes  are  usually  painted  a  color  to  corre- 
spond with  their  surroundings,  although  the  sprinklers 
themselves  should  never  be  given  any  foreign  coating. 

All  manner  of  risks  are  equipped,  including  hotels,  parts 
of  dwellings,  grain  elevators,  car  barns,  rolling  mills,  school- 
houses,  and  even  a  few  steamboats,  to  mention  some  of  the 
unusual  sorts,  as  well  as  mills  and  factories,  warehouses 
and  stores  of  all  kinds,  even  the  most  elaborately  finished 
department  stores.  When  the  owner  prefers  to  sacrifice 
accessibility  to  the  ornamentation  of  the  store,  the  pipes 

»  By  Frederick  C.  Moore,  Superintendent,  Special  Risk  Department 
of  the  Hartford  Fire  Insurance  Company,  Hartford. 

263 


264  YALE  READINGS  IN  INSURANCE 

are  sometimes  concealed  behind  the  ceiling  finish,  only  the 
sprinklers  themselves  projecting. 

In  places  which  are  freezing  cold  in  winter,  compressed 
air  is  maintained  in  the  pipes,  instead  of  water,  by  means 
of  a  "dry  valve,"  which  automatically  allows  water  to 
enter  when  the  compressed  air  escapes  upon  the  opening 
of  a  sprinkler.  Thus  the  system  is  maintained  operative 
despite  cold. 

The  ordinary  sprinkler  opens  at  155°  or  160°  F.,  but  for 
places  where  the  temperature  is  too  high  to  use  these, 
special  sprinklers  are  made  with  solder  fusing  at  212°, 
286°,  or  360°  F.,  though  the  less  necessity  there  is  for  the 
use  of  these  the  better,  because  they  are  slower  to  open. 

With  the  two  methods  just  outlined,  however,  the  ex- 
tremes of  heat  and  cold  commonly  found  can  be  met,  so 
that  it  is  feasible  to  have  sprinkler  protection  in  all  parts 
of  any  risk. 

The  business  of  installing  sprinklers  is  almost  entirely  in 
the  hands  of  the  companies  who  manufacture  them,  as 
they  will  in  most  cases  sell  the  sprinklers  to  only  a  few  con- 
tractors who  have  long  had  dealings  with  them,  an  attitude 
based  upon  the  belief  that  the  work  requires  long  experience 
to  avoid  errors  which  lead  to  expensive  changes  before  the 
work  finally  complies  with  the  insurance  engineering  rules, 
a  doctrine  that  is  quite  in  harmony  with  their  business  in- 
terests, and  which  is  true  for  the  average  case  of  a  property 
owner  who  expects  his  own  mechanics  to  do  the  work  well. 
These  sprinkler  companies  will  furnish  detailed  plans  in 
advance  to  the  insurance  organization  which  is  to  pass 
judgment  upon  the  work,  so  that  the  annoyance  of  sub- 
sequent changes  is  avoided  by  having  the  plan  approved 
at  the  beginning.  As  the  expense  of  forming  and  main- 
taining an  organization  that  can  make  plans  and  estimates 
and  do  the  work  in  accordance  with  the  needs  of  insurance 
authorities  and  the  property  owners  is  high,  and  the  in- 
vention of  a  sprinkler  and  the  other  necessary  appurte- 
nances, which  will  meet  insurance  approval,  is  slow  and 


AUTOMATIC  SPRINKLERS  265 

difficult,  there  are  few  companies  in  the  business,  and  it 
is  exceedingly  difficult  for  a  new  company  to  start. 

It  is  of  great  importance,  particularly  to  the  insurance 
companies,  that  any  new  sprinkler  shall,  before  approval, 
be  proven  to  be  able  to  open  when  it  ought,  even  under  the 
disadvantage  of  slight  corrosion  or  loading,  and  that  it 
shall  not  open  when  it  is  not  needed.  To  comply  with 
both  conditions  is  difficult,  as  the  large  number  of  sprinkler 
patents  shows,  and  it  requires  about  a  year  to  make  all  the 
tests,  which  are  all  made  by  the  same  organization,  and 
are,  therefore,  comparative.  There  are  only  seven  differ- 
ent sprinklers  in  common  use  to-day. 

The  customary  preliminary  procedure  to  obtain  a  sprin- 
kler equipment  is  to  apply  to  the  insurance  organization, 
which  passes  judgment  upon  improvements  for  a  plan  and 
requirements  to  show  what  is  necessary,  in  their  judgment, 
to  protect  the  risk.  This  information  will  be  submitted 
in  writing  and  will  enable  the  owner  to  obtain  from  con- 
tractors the  cost  of  the  work.  As  he  can  also  find  out  how 
much  insurance  will  cost  under  the  proposed  conditions,  a 
comparison  of  the  cost  with  the  saving  can  be  accurately 
made,  to  govern  the  final  decision  whether  to  make  the 
investment.  It  is  highly  desirable  to  advise  fully  the  per- 
son who  is  to  make  the  suggestions  of  any  changes  which 
may  take  place  in  the  future,  so  that  their  influence  on  the 
equipment  may  be  fairly  considered,  which  will  be  well 
repaid  by  resulting  economies  when  the  necessary  exten- 
sions to  the  protection  come  to  be  made.  If  the  property 
owner  possesses  the  necessary  information,  or  can  have 
expert  advice,  it  is  an  excellent  plan  to  draw  up  a  plan 
and  requirements  which  can  be  considered  in  detail  from 
every  point  of  view  at  leisure,  the  perfected  result  to  be 
submitted  to  the  insurance  organization  whose  approval  he 
desires,  which  has  the  merit  of  enabling  the  owner  to  meet 
the  representative  of  that  organization  with  an  appreciation 
of  the  matter  that  will  enable  him  to  discuss  fully  and 
definitely,  ensuring  complete  understanding  on  both  sides. 


266  YALE  READINGS  IN  INSURANCE 

It  is  natural  to  ask  what  benefits  are  given  by  automatic 
sprinklers?  The  most  important  one  is  the  protection  to 
an  established  industry  by  decreasing  to  the  utmost  the 
chance  of  its  being  swept  out  of  existence  by  an  internal 
fire,  which  is  insurance  of  prosperity.  The  product  of  such 
a  plant  is  worth  more  to  a  buyer  who  is  depending  on  it 
than  that  of  an  unprotected  factory.  Another  is  the 
ability  to  obtain  insurance  indemnity  to  cover  fully  risks 
of  very  large  value,  which  would  be  impossible  without 
sprinkler  protection,  upon  which  insurance  companies  rely 
to  protect  them  in  the  assumption  of  much  greater  than 
ordinary  liability;  similarly,  a  risk  of  even  moderate  value, 
which,  nevertheless,  can  not  obtain  full  insurance  because 
physical  disadvantages  are  too  heavy,  may  be  so  adequately 
protected  by  this  means  that  insurance  is  readily  procured. 

A  complete  equipment  usually  includes  hydrants  and 
hose,  and  various  other  appliances  besides  sprinklers,  often 
the  protection  of  important  door,  window,  and  floor  open- 
ings, and  sometimes  the  modification  of  other  physical 
conditions,  because  a  siu"vey  for  laying  out  sprinkler  pro- 
tection considers  the  improvement  of  the  risk  as  a  whole, 
to  the  greatest  degree  consistent  with  the  governing  con- 
ditions, for  at  the  low  rates  under  which  such  protected 
risks  are  written,  not  only  must  the  protection  be  per- 
fected, but  the  chance  of  occurrence  of  fire  must  be  de- 
creased, and  its  opportunity  to  spread,  limited.  The  cost 
of  sprinkler  protection  is  therefore  increased  by  these  other 
improvements,  and  the  whole  varies  so  much  that  no  set 
rule  is  reliable,  but  it  is  not  uncommon  to  save  enough  on 
the  insurance  premium  by  reduction  in  rate,  to  offset  the 
cost  in  four  or  five  years,  which  is  excellent  interest  on  the 
investment,  and  a  better  showing  may  be  made  under 
specially  favorable  circumstances.  Considering  only  the 
automatic  sprinkler  system  inside  the  building  to  the  point 
where  the  supply  mains  enter,  not  including  any  work  on 
the  water  supplies,  a  roughly  approximate  idea  of  cost 
may  be  obtained,  by  estimating  the  number  of  sprinklers 


AUTOMATIC  SPRINKLERS  267 

required  on  the  basis  of  80  square  feet  of  floor  space  per 
sprinkler,  and  multiplying  the  number  of  sprinklers  by 
$3.50.  Special  conditions  will  vary  the  cost  considerably, 
and  to  the  cost  for  the  sprinkler  system  is  always  to  be 
added  that  of  the  water  supplies  and  other  improvements. 
An  ordinary  risk  will  expend  $3000  to  $5000,  and  large 
ones  ten  times  as  much. 

The  cost  is  not  directly  proportionate  to  the  insurable 
value  and  there  are  certain  essentials  for  any  risk,  however 
small,  so  that  it  ordinarily  does  not  pay  to  equip  risks  of 
small  value  and  there  are  comparatively  few  equipped 
carrying  less  than  $40,000  insurance.  The  average  amount 
of  insurance  per  risk  for  126  risks  thus  equipped  was 
$251,182. 

The  important  reason  why  automatic  sprinkler  protec- 
tion successfully  controls  fires  is  because  it  is  automatic. 
The  instant  heat  opens  a  sprinkler,  water  issues  on  the  fire, 
day  or  night,  work  days  or  holidays,  summer  or  whiter, 
provided  conditions  are  not  abnormal.  The  result  is 
shown  by  the  record  of  8942  fires,  reported  in  risks  equipped 
with  sprinklers  during  a  period  of  more  than  twelve  years, 
of  which  5791  were  extinguished  by  sprinklers  unaided, 
in  only  483  cases  did  sprinklers  prove  practically  useless, 
and  in  the  other  fires  other  apparatus  was  also  used.  In 
7239  cases,  83  per  cent.,  not  more  than  twelve  sprinklers 
opened,  which  shows  the  value  of  applying  the  water  at 
the  very  outbreak  of  fire.  A  single  sprinkler  at  30  pounds 
pc^r  square  inch  will  dischai'ge  as  a  fine  spray  about  thirty 
gallons  a  minute.  Under  most  conditions  the  operation 
of  one  or  two  sprinklers  would  have  30  pounds  pressure. 
At  100  pounds  the  impression  is  created  in  the  mind  of 
an  observer  that  the  spray  is  so  dense  and  forcible  that 
a  man  directly  under  the  sprinkler  would  strangle. 

Notwithstanding  the  copious  discharge  under  adequate 
pressure,  it  is  always  necessary  to  exercise  great  care  to 
prevent  conditions  which  will  cause  fire  to  open  many 
sprinklers.    The  water  supply  is  not  sufficient  in  most  cases 


268  YALE  READINGS   IN  INSURANCE 

to  remain  effective  when  the  loss  of  pressure  by  friction, 
which  very  heavy  draft  occasions,  cuts  the  pressure  at 
the  sprinklers  down  below  the  2.5  pounds  during  opera- 
tion, which  is  admitted  as  the  minimum  allowable.  Because 
of  this  possibility  the  general  belief  is  that  sprinkler  pro- 
tection is  principally  dependable  when  fires  do  not  gain 
headway  enough  to  open  very  many  sprinklers,  and  this  is 
a  safe  and  reasonably  true  doctrine.  Wlien  the  water 
supply  is  very  strong,  sprinklers  will  stop  a  heavy  fire 
which  opens  many  heads. 

There  are  conditions  which  prevent  sprinklers  from  giving 
the  protection  expected,  even  when  properly  installed,  and 
their  favorable  record  is  at  the  cost  of  continual  inspection 
with  the  cooperation  of  the  owner.  In  places  where  cor- 
rosive vapors  are  given  off  by  the  processes,  such  as  dye- 
houses,  bleacheries,  dry  rooms,  chemical  works,  and  many 
others,  considerable  numbers  of  the  heads  become  so  cor- 
roded that  they  will  not  open  as  they  should,  and  this  is 
apt  to  be  the  case  after  a  longer  time,  even  with  those 
which  have  been  specially  treated  by  the  maker  with  a 
protective  coating.  Their  condition  can  not  be  reliably 
gauged  from  their  appearance,  but  must  be  determined 
by  an  expert  test  of  a  representative  number  of  those  sus- 
pected, such  as  can  be  obtained  with  the  aid  of  the  insurance 
authorities.  It  is  a  serious  condition,  absolutely  putting 
the  sprinklers  out  of  commission,  and  to  be  remedied  only 
by  replacing  the  sprinklers  as  often  as  necessary. 

From  carelessness  or  ignorance,  sprinklers  frequently 
become  coated  with  paint,  whitewash  (particularly  from 
spraying  machines),  bronze  or  silver  gilt,  encrustations  of 
soap,  sugar,  cement,  plaster,  or  other  materials,  which 
are  very  apt  to  be  similarly  objectionable. 

Another  trouble  is  that  frequently  an  employee  of  the 
property  owner  disconnects  or  shuts  off  parts  of  the  system 
on  account  of  repairs  to  building  or  machinery,  forgetting 
to  put  the  sprinklers  back  into  service  as  soon  as  possible. 
It  is  a  too  frequent  occurrence,  and  leads  to  the  removal 


AUTOMATIC  SPRINKLERS  269 

of  sprinkler  protection  from  sections  of  a  few  heads  to  the 
systems  of  entire  buildings.  The  same  owner  would  re- 
quire to  be  told  if  steam  were  shut  off  from  the  engine  five 
minutes,  and  he  ought  to  be  just  as  particular  about  the 
water  for  the  sprinklers.  Shnilar  in  effect  is  the  erection 
of  additions,  mezzanine  floors,  racks  hung  from  the  ceiling, 
partitions,  or  any  structures  which  form  unprotected 
sheltered  spaces  in  or  adjoining  a  building  equipped  with 
sprinklers,  and  the  system  should  be  promply  extended  to 
cover  them. 

Enough  has  been  said  of  the  commoner  causes  of  poor 
sprinkler  service  to  emphasize  the  important  principle  that 
the  owner  should  devote  care  and  attention  to  the  sprinkler 
system,  as  he  would  to  any  part  of  his  machinery  of  pro- 
duction, and  the  greatest  aid  to  such  proper  supervision 
is  an  inspection  by  some  specially  delegated  employee  at 
regular,  frequent  intervals,  filing  a  written  report.  Nearly 
one-half  of  the  sprinkler  failures  on  record  are  due  in  about 
equal  numlDers  to  water  being  shut  off  or  to  defective  or 
partial  equipment,  the  first  entirely  preventable,  and  the 
second  to  be  much  reduced  when  acquaintance  with  the 
matter  teaches  the  owner  that  a  sprinkler  system,  as  well 
as  his  machinery,  has  its  limitations. 

With  some  conditions  a  sprinkler  equipment  can  not 
be  expected  to  cope.  It  wih  be  overwhelmed  by  confla- 
gration, long  continued  exposure  from  without,  which 
very  likely  cuts  down  the  pressure  of  its  water  supply  by 
heavy  draft  of  fire  department.  It  is  apt  to  be  disabled 
partly  or  wholly  at  the  start  in  a  risk  where  the  processes 
give  rise  to  explosion.  In  hollow  walled,  hollow  ceiled 
buildings  it  can  not  extinguish  fire  in  the  hollow  spaces. 
In  industries  using  large  amounts  of  inflammable  liquids, 
particularly  those  lighter  than  water,  or  large  piles  of 
articles  which  shed  water,  like  barrels,  lumber,  furniture, 
—  it  will  not  extinguish  the  first  or  reach  the  fire  in  the 
others. 

The  life  of  a  sprinkler  system  put  in  according  to  present 


270  YALE  READINGS  IN  INSURANCE 

rules  ought  to  be  at  least  thirty  years,  under  average  con- 
ditions and  probably  longer.  Pipe  put  in  twenty-five 
years  ago  is  as  good  as  ever,  but  it  was  wrought-iron  pipe, 
while  soft  steel  pipe  is  used  now.  The  sprinklers  them- 
selves have  given  no  proof  that  they  deteriorate  with 
mere  age,  if'  properly  designed  in  the  first  place.  From 
the  point  of  view  of  cost  of  maintenance  the  present  per- 
fection of  the  methods  of  designing  and  installing  fire 
protection  is  a  more  important  matter  than  the  life  of 
the  system,  for  it  practically  guarantees  that  it  will  be 
unnecessary  duiing  its  Ufetime  to  rebuild  a  system  be- 
cause it  is  not  adequate  for  the  work  it  was  supposed 
to  do.  Many  of  the  early  systems  did  not  get  a  chance 
to  wear  out,  because  experience  showed  they  were  not 
dependable  and  they  were  remodeled. 

Factories  and  mills  constitute  the  larger  number  of 
risks  equipped,  many  of  them  isolated.  To-day  the  equip- 
ment of  risks  in  the  congested  areas  of  cities  is  becoming 
much  more  frequent,  which  is  an  excellent  thing  to  de- 
crease the  chances  for  conflagration  by  diminishing  the 
number  of  risks  in  which  serious  fires  may  occur,  because 
such  risks  are  usually  large  and  therefore  troublesome  to 
control  if  they  burn.  The  growth  of  automatic  sprinkler 
protection  is  due  to  the  unquestionable  fact  that  it  is  the 
best  known  method  of  extinguishing  fires  inside  a  building. 


CHAPTER  XVI 

FACTORY   MUTUAL   FIRE   INSURANCE  ^ 

The  system  of  factory  mutual  insurance  was  established 
by  the  late  Zachariah  Allen,  of  Providence,  Rhode  Island, 
in  the  year  1835,  when  he  and  his  associates  organized 
the  Providence  Manufacturers'  Mutual  Fire  Insurance  Com- 
pany. In  1848  the  Rhode  Island  Mutual  Fire  Insurance 
Company  was  established. 

On  January  1,  1900,  the  Boston  Manufacturers'  Mutual 
Fire  Insurance  Company  entered  upon  the  fiftieth  year 
of  its  existence.  The  first  policies  issued  were  dated 
September  14,  1850.  In  that  and  in  the  ensuing  year, 
1851,  one  hundred  and  eighty  original  policies  were  issued 
to  one  hundred  and  ten  members  in  the  sum  of  $3,320,560. 
The  cash  premium  or  deposit  subject  to  losses  and  expenses 
amounted  to  $33,320.  The  maximum  hazard  taken  on  a 
single  risk  was  $30,000.  The  rates  varied  from  a  mini- 
mum of  40  cents  on  some  storehouses  to  1^^  per  cent,  on 
certain  mills.  These  rates  had  been  established  by  the 
two  older  Providence  mutual  companies,  the  Manufac- 
turers' Mutual  and  the  Rhode  Island  Mutual.  I  am  in- 
formed that  the  mutual  rates  were  made  on  the  basis  of 
the  schedule  of  some  of  the  older  stock  fire  insurance  com- 
panies, at  three-quarters  the  charge  made  by  the  stock 
companies  on  the  same  property. 

It  is  evident  that  the  members  and  directors  rested 
upon  the  power  of  assessment  more  than  upon  the  cash 

*  By  Edward  Atkinson,  late  President  of  the  Boston  Manufacturers' 
Mutual  Fire  Insurance  Cornj)aiiy,  Bostoti.  Reprinted  from  "The 
Prevention  of  Loss  by  Fire";     Damrcll  and  Upham.     Boston,  1900. 

271 


272  YALE  READINGS  IN  INSURANCE 

payment  in  the  early  history  of  this,  and  other  factory 
mutual  companies,  yet,  since  1850,  there  has  been  no 
assessment  required  by  this  or  any  other  of  the  associated 
factory  mutual  companies. 

During  the  earlier  period  of  their  history  the  picker 
departments  of  cotton  and  woolen  factories  were  not 
insured  by  the  mutual  companies,  nor  can  I  find  any  evi- 
dence that  they  were  separately  insured.  The  risk  was 
probably  carried  by  the  owners.  It  was  deemed  excess- 
ive. But  iimnediate  measures  were  taken  for  protecting 
pickers  in  much  greater  measure  than  for  the  protection 
of  mills,  and  from  computations  which  I  have  recently 
made  of  the  proportions  of  loss  in  ratio  to  value  of  picker 
buildings  and  contents,  as  compared  to  the  main  mills 
and  contents,  the  loss  relatively  has  been  less  than  in  the 
works  proper;  thus  proving  again  the  one  rule  developed 
in  this  work,  a  rule  which  must  be  fully  comprehended 
outside  the  lines  of  the  factory  mutual  companies  if  the 
terrible  losses  by  fire  in  the  United  States  are  to  be  reduced. 
The  rule  is  as  follows : 

After  the  insurance  company  has  done  its  duty  by  care- 
ful selection  of  risks  and  thorough  inspection,  all  that  it 
can  do  is  to  pay  indemnity  for  loss  which,  if  large,  is  in 
nine  cases  out  of  ten  due  either  to  the  lack  of  apparatus 
for  preventing  such  loss,  or  to  lack  of  care  and  order  in 
the  conduct  of  the  work.  The  only  persons  who  can  pre- 
vent loss  by  fire  are  the  owners  or  occupants  of  the  insured 
premises.  Upon  them  rests  the  responsibility  for  heavy 
loss,  when  any  occurs,  in  nearly  every  fire. 

It  has  always  been  the  practice  of  the  mutual  companies 
and  of  late,  with  excellent  results,  the  practice  of  the  stock 
insurance  companies,  to  instruct  owners  and  occupants 
upon  their  duties  to  their  own  property,  and  to  keep  tliem 
up  to  the  mark  by  constant  supervision  and  by  refusing 
to  grant  contracts  of  indemnity  to  those  who  neglect  their 
own  duty. 

The  most  difficult  work  of  the  president  of  a  mutual 


FACTORY  MUTUAL  FIRE  INSURANCE  273 

fire  insurance  company  is  to  do  away  with  the  antag- 
onism of  owners  against  the  underwriters,  and  to  secure 
that  cooperation  in  preventing  loss  by  fire  which  ensues 
as  soon  as  the  identity  of  the  interest  of  tlie  owner  and  the 
underwriter  is  estabUshed. 

In  1850,  when  the  Boston  Manufacturers'  Mutual  Fire 
Insurance  Company  was  organized,  the  Manufacturers' 
Mutual  Fire  Insurance  Company,  of  Providence,  Rhode 
Island,  had  been  in  operation  for  fifteen  years;  the  Rhode 
Island  Mutual  Fire  Insurance  Company  for  three  years. 
Each  of  the  above-named  companies  issued  policies  not 
exceeding  $15,000  on  a  single  risk.  This  company  began 
by  issuing  policies  not  exceeding  $30,000  on  a  single  risk. 

The  Firemen's  Mutual  Fire  Insurance  Company  was 
organized  in  1854,  the  Worcester  Manufacturers'  Mutual 
in  1855,  the  State  Mutual,  of  Providence,  in  1858,  and  the 
Arkwright,  of  Boston,  in  1860.  Several  years  elapsed 
before  any  other  mutual  companies  were  organized. 

The  losses  have  never  been  so  great  in  any  one  year  as  to 
subject  either  one  of  these  companies  to  the  necessity  of 
making  an  assessment  in  addition  to  the  sum  deposited 
at  the  beginning  of  each  term,  during  this  period  of  fifty 
years.  Had  this  property  been  of  necessity  insured  in 
any  other  way  than  by  the  factory  mutual  companies, 
there  would  have  been  two  periods,  one  immediately 
after  the  Chicago  fire  and  one  immediately  after  the  Bos- 
ton fire,  when  a  large  part  of  the  contracts  of  indemnity 
which  had  been  paid  for  would  have  become  worthless. 
That  danger  of  great  city  conflagrations  still  exists. 

The  secret  of  this  success  is  to  be  found  in  the  fact  that 
when  men  combine  with  each  other  for  mutual  insurance 
they  very  soon  learn  the  one  lesson,  which  I  repeat: 

The  only  persons  who  can  prevent  loss  by  fire  are  the 
owners  or  occupants  of  the  insured  premises.  Upon  them 
rests  the  responsibiUty  for  heavy  loss,  if  any  occurs,  in 
nearly  every  fire.  All  that  the  insurance  company  can 
do  is  to  pay  indemnity  for  loss,  which,  if  large,  in  nine 


274  YALE  READINGS  IN   INSURANCE 

cases  out  of  ten  is  due  to  the  lack  of  apparatus  for  prevent- 
ing loss  or  to  lack  of  care  and  order  in  the  conduct  of  the 
work. 

At  later  dates  eight  other  factory  mutual  companies 
have  been  organized  in  Massachusetts  and  Rhode  Island, 
and  are  now  associated  with  the  ten  senior  companies  for 
the  joint  inspection  of  risks,  but  as  they  came  in  after 
the  greater  part  of  all  the  older  risks  had  been  covered 
by  the  senior  companies,  they  extended  their  service  over 
such  large  concerns  as  could  not  be  wholly  covered  by  the 
senior  companies  and  over  other  classes  in  a  wider  area, 
in  which  service  they  have  rendered  a  proportionate  bene- 
fit to  their  members;  their  earlier  dividends  exceeding 
those  of  the  senior  companies  in  their  early  history;  their 
recent  dividends  exceeding  those  of  the  senior  companies 
down  to  and  including  1879,  when  great  changes  WTre 
made  in  the  general  conduct  of  the  system  as  will  be  here- 
after stated. 

In  1878  the  revenue  of  this  company  from  premiums 
was  $366,000  —  the  maximum  hazard  on  a  single  risk, 
$80,000.  The  liability  to  assessment  was  still  created  by 
the  execution  of  notes  promising  to  pay  five  times  the 
cash  premium  in  any  emergency.  The  giving  of  these 
notes  was  often  objected  to,  and  was  in  fact  superfluous. 
Measures  were  presently  taken  for  a  change  of  the  law  by 
which  the  acceptance  of  the  policy  created  the  liability, 
but  it  was  evident  to  the  imdersigned  that  the  cash  receipts 
ought  to  be  brought  to  so  large  a  ratio  to  the  maximum 
hazard  taken  on  a  single  risk,  as  to  render  resort  to  assess- 
ment so  remote  a  contingency  as  to  be  disregarded  sub- 
stantially, and  to  that  status  the  present  condition  of  the 
company  has  been  brought. 

Before  1878  no  customary  or  regular  meetings  of  the 
directors  had  been  held.  Inspections  had  been  made 
in  a  desultory  manner  by  the  presidents  or  secretaries 
of  the  several  companies  about  once  a  year,  usually  a  few 
weeks  before  the  expiration  of  the  policy.     Modern  safe- 


FACTORY  MUTUAL  FIRE  INSURANCE  275 

guards  had  not  been  thoroughly  investigated.  Auto- 
matic sprinklers  were  known,  but  had  secured  little  or  no 
attention.  There  were  no  experience  tables,  no  classifi- 
cation of  risks,  and  no  real  comprehension  of  the  relative 
hazard  on  different  classes.  Everything  depended  on 
the  personal  knowledge  and  the  extraordinary  memories 
of  Messrs.  Manton  and  Whiting.  Losses  had  been  subject 
to  great  variation  year  by  year,  as  will  appear  from  the 
diagrams  submitted  with  each  annual  report.  It  had 
become  manifest  to  myself  and  other  directors  that  a  very 
complete  change  must  be  made  in  the  conduct  of  the  whole 
system,  and  that  new  safeguards  must  be  found  in  ord(3r 
to  meet  the  increasing  hazard  of  larger  floor  areas,  mills 
of  many  stories  in  height,  higher  speed,  new  dyestuffs,  and 
to  anticipate  the  new  hazard  of  mineral  oil,  then  gradually 
being  introduced  as  a  lubricant,  of  electricity,  etc. 

There  also  existed  a  feeling  among  many  members 
such  as  governs  ordinary  business,  ''not  to  put  too  many 
eggs  in  one  basket."  Those  who  did  not  investigate  the 
subject  were  governed  in  the  distribution  of  their  insurance 
by  the  amount  of  the  policy,  and  not  by  the  proportion  of 
the  policy  to  the  revenue  of  each  company.  It  did  not 
occur  to  them,  and  it  does  not  now  occur  to  many  others, 
especially  to  applicants,  that  if  the  annual  income  from 
premiums  is  three  to  four  times  the  maximum  hazard  taken 
on  any  single  risk,  it  is  as  safe  for  the  member  to  take, 
and  for  the  insurance  company  to  grant,  a  policy,  say  of 
$200,000  on  an  income  of  $900,000,  as  it  would  be  to  grant 
a  policy  of  $20,000  on  an  income  of  $90,000.  On  the  other 
hand,  by  such  a  concentration,  the  relative  expenses  of 
conducting  the  several  companies  are  greatly  diminished. 

In  1878  the  first  duty  of  the  president  was  to  eliminate 
poor  risks;  the  amount  of  insurance  written  was  $43,000,000. 
In  that  year  and  the  next  a  large  amount  of  insurance  was 
canceled  which  could  not  be  brought  to  a  proper  standard 
of  saf(!ty,  but  new  risks  were  added,  so  that  in  1879  the 
amount  written  was  $44,500,000. 


276  YALE  READINGS  IN   INSURANCE 

Measures  were  taken  to  establish  a  quarterly  inspection 
under  the  supervision  of  Mr.  William  B.  Whiting,  the 
secretary  of  this  company.  A  regular  system  was  organ- 
ized, the  accounts  being  kept  on  the  books  of  the  Boston 
company,  the  charges  being  shared  in  proportion  to  the 
relative  service  by  all  the  senior  companies  and  a  portion 
of  the  junior  companies.  At  a  later  date  an  association 
was  formed  to  conduct  the  system  of  joint  inspection  at 
the  joint  expense  of  all  the  companies,  since  which  date 
the  accounts  have  been  kept  upon  a  separate  set  of  books. 
The  executive  officers  now  meet  in  monthly  conference. 

In  1880  what  may  be  called  the  science  of  preventing 
loss  by  fire  was  fairly  entered  upon,  and  at  that  date 
measures  were  taken,  after  careful  consultation  with  the 
very  few  manufacturers,  who  at  their  own  motion  put  in 
the  automatic  sprinklers,  for  the  extension  of  that  ser- 
vice, which  has  now  become  practically  universal.  With- 
out their  support  and  the  confidence  due  to  their  practical 
experience,  the  writer  would  have  had  much  more  diffi- 
culty in  promoting  the  adoption  of  sprinklers,  as  some  of 
his  own  insurance  associates  were  skeptical,  and  two  were 
positively  opposed  to  them.  But  the  writer  had  become 
convinced  that,  unless  the  hazard  of  larger  and  larger 
factories,  higher  speed,  etc.,  coukl  be  met,  the  mutual 
system  would  break  down;  and  he  then  told  his  associates 
that  automatic  sprinklers  nuist  be  made  a  condition,  cost 
what  it  might.  In  ten  years  more  than  half  the  work 
was  done;  in  twenty  years  it  has  been  completed. 

In  1879  a  careful  compilation  was  also  begun,  by  which 
the  combined  experience  of  all  the  mutual  companies 
could  be  registered  year  by  year.  In  this  company  risks 
were  divided  into  ten  classes;  losses  were  sorted  in  propor- 
tion to  risk  taken  and  premium  received  from  the  beginning 
of  the  company  to  that  date.  A  very  wide  variation 
from  the  average  was  disclosed.  On  one  class  the  loss 
had  been  over  60  per  cent,  of  the  premium  received;  on 
another  it  had   been   but   10  per  cent.     Measures  were 


FACTORY  MUTUAL  FIRE  INSURANCE  277 

taken  for  the  more  complete  protection  of  the  risks  in 
which  the  heavy  losses  had  been  disclosed  and  rates  were 
raised.  On  other  risks  slight  concessions  in  rate  were 
made,  but  since  the  number  of  hazards  in  each  class, 
with  the  exception  of  tlii'ee,  did  not  suffice  to  establish  a 
rule,  one  loss  of  considerable  amount  throwing  the  average 
out  for  a  number  of  years,  time  was  allowed  to  elapse  to 
justify  further  changes,  if  any  were  required. 

Various  changes  have  been  made  in  the  adjustment  of 
rates,  the  inclusion  of  new  risks  and  the  exclusion  of  poor 
risks,  so  that  the  average  loss  of  premium  received  on  each 
class  has  been  brought  to  as  close  an  approach  to  uniform- 
ity as  it  is  probable  can  ever  be  attained.  We  are  occa- 
sionally liable  to  a  large  loss  in  a  class  in  which  there  is  a 
small  number  of  risks,  which  of  necessity  throws  the  average 
out  for  a  considerable  period  of  time.  The  compila- 
tion of  statistics  is  very  necessary  as  a  guide  to  the  judg- 
ment of  the  underwriter,  but  the  president,  especially 
the  mutual  underwriter,  who  should  undertake  to  govern 
the  conduct  of  the  work  by  giving  regard  only  to  the 
statistics  would  either  fail,  or  would  be  subject  to  a  very 
wide  variation  from  any  equitable  adjustment  of  the  rela- 
tions of  each  member  to  the  other. 

There  have  been  variations  in  the  judgment  of  the  differ- 
ent boai'ds  of  directors  in  the  several  companies.  To 
some  the  so-called  conflagration  hazard  has  given  fear  of 
an  assessment;  but  both  the  statistics  and  the  observa- 
tion of  others  disclose  the  fact  that  in  the  great  factory 
cities,  where  what  are  called  the  single  hazards  are  so 
near  to  each  other  as  to  suggest  the  danger  of  an  exten- 
sion of  the  fire  by  conflagration,  the  additional  safeguards 
in  the  supply  of  water  and  the  aid  which  one  mill  can 
render  to  another  have  resulted  in  a  considerably  less  pro- 
portion of  loss,  either  to  I'isk  taken  or  premium  received, 
than  is  disclosed  by  the  figures  of  the  isolated  mills. 

No  fire  in  any  one  of  the  large  factory  cities  has  yet 
extended  in  a  destructive  manner  from  one  risk,  deemed  a 


278  YALE  READINGS  IN   INSURANCE 

separate  hazard  to  another,  eitlier  in  the  same  yard  or  in 
an  adjoining  mill  yard.  There  have  been  but  five  fires 
which  have  extended  from  the  building,  or  separate  risk 
in  which  the  fire  originated,  to  another  building  covered 
by  our  insurance,  to  such  a  degree  as  to  cause  a  consider- 
able damage  in  the  second  building.  These  fires  have 
occurred  in  what  are  called  our  isolated  risks. 

There  has  recently  been  a  fire  which  passed  from  one 
auxiliary  building  into  another  in  the  same  yard  without 
substantially  doing  injury  to  the  main  mill,  starting  in 
an  unsprinkled  section  (now  sprinkled),  and  extending 
for  want  of  skill  in  the  use  of  the  fire  apparatus;  but  these 
two  buildings  were  not  considered  separate  risks  accord- 
ing to  the  construction  of  that  term. 

The  mutual  contract  cannot  be  safely  adopted  in  the 
crowded  districts  of  cities,  for  the  reason  that  the  owner 
or  occupant  of  one  building  may  have  a  very  dangerous 
neighbor  in  the  next,  over  whom  he  has  no  control;  he 
may  not  therefore  expect  to  reduce  the  cost  of  insurance 
to  the  lowest  standard  attained  under  more  favorable 
conditions. 

During  the  fifty  years  of  the  existence  of  this  company 
there  has  been  no  instance  of  fire  intentionally  set  by  the 
owner  or  occupant  for  the  purpose  of  getting  money. 
There  has  been  but  one  suspicion  of  such  fire,  which  after 
some  years  was  disproved  by  the  confession  of  the  incen- 
diary who  had  no  interest  in  the  property.  There  has 
been  but  one  resort  to  litigation.  That  was  in  the  case 
of  the  Pemberton  mill,  which  owing  to  a  defect  in  a  cast- 
iron  post  fell  down,  taking  fire  after  the  fall.  The  ques- 
tion was  raised  by  the  underwriters  whether  this  was  an 
alteration  in  the  risk  not  contemplated  by  the  contract, 
due  to  the  neglect  of  the  owner.  So  far  as  I  can  learn, 
the  case  was  submitted  to  arbitration,  and  was  compro- 
mised by  the  payment  of  a  sum  of  money,  corresponding 
to  the  value  of  the  property  after  the  fall  and  before  the 
fire.     Wliat  proportion  this  came  to  I  am  imable  to  say. 


FACTORY  MUTUAL  FIRE  INSURANCE  279 

I  repeat  once  more,  distrust  has  sometimes  been  caused 
by  misapprehension  or  misrepresentation  in  regard  to  the 
risks  taken  in  the  large  factory  cities,  of  which  there  are 
six,  in  which  many  mills  insured  separately  are  on  the  same 
lines  of  canal  and  are  sometimes  held  to  be  subject  to  a 
conflagration  hazard.  The  experience  of  fifty  years  proves 
conclusively  that  the  benefit  and  additional  security  due 
to  this  proximity  is  much  greater  than  the  danger  of  a  fire 
extending  from  one  mill  to  another.  There  has  been  no 
such  incident.  On  the  other  hand,  bad  fires  have  occurred 
in  the  heart  of  these  cities,  with  high  winds  blowing  and 
under  conditions  which,  had  they  been  the  ordinary  mer- 
cantile risks  of  a  city,  might  have  caused  an  extensive 
conflagration;  but  the  aid  which  each  mill  extends  to  the 
other  and  the  enormous  flood  of  water  that  can  be  poured 
upon  any  single  fire  from  roof  hydrants  and  other  vantage 
points  has  enabled  the  well-organized  mill  fire  depart- 
ments, working  in  cooperation  with  the  city  fire  depart- 
ments, to  put  out  all  such  fires  without  any  destructive 
extension  from  the  building  in  which  they  originated.  I 
again  call  attention  to  this  fact  because  the  same  precau- 
tions and  safeguards  could  be  adopted  for  the  protection 
of  city  warehouses  and  blocks,  and  until  they  are,  the  appal- 
ling danger  of  great  conflagrations  will  continue. 

One  or  two  other  incidents  may  be  named.  It  was 
formerly  the  practice  to  appoint  outside  adjusters  as  well 
as  to  compromise  on  an  appraisement;  both  practices  are 
now  ended.  Losses  are  now  adjusted  by  representatives 
of  the  owners  and  of  the  underwriters  as  nearly  according 
to  the  facts  as  it  is  possible  to  appraise  them.  There  has 
been  no  difficulty  in  carrying  out  this  plan  to  the  satis- 
faction of  all  parties  in  interest. 

It  may  be  added  that,  in  four  instances,  losses  have 
been  settled  to  the  satisfaction  of  both  parties,  when 
subsequent  adjustments  or  (^ vents  disclosed  the  fact  that 
very  considerable  omissions  had  been  made  by  the  owners 
in  submitting  their  statement  of  i)roperty  damaged,  one 


280  YALE  READINGS  IN  INSURANCE 

mistake  being  discovered  many  months  after  the  adjust- 
ment. In  these  cases  the  owners  have  been  requested 
to  submit  their  additional  claims,  and  the  amounts  have 
been  paid,  the  intention  of  the  mutual  companies  being 
to  pay,  in  every  instance,  the  exact  measure  of  indemnity 
that  may  be  justly  due.  In  another  recent  instance  a 
loss  had  been  settled  by  the  principal  owner,  the  treasurer 
being  away  for  his  health,  on  the  assumption  that  the 
goods  stored  had  been  taken  in  the  inventory  of  a  few 
days  before  at  market  value.  Two  months  later,  on 
advices  from  the  treasurer,  it  appeared  that  these  goods 
had  been  valued  at  20  per  cent,  less  than  market  value. 
The  case  was  re-opened  and  the  difference  cheerfully 
paid. 

In  only  two  or  three  instances  that  the  writer  can  re- 
member has  there  appeared  to  be  any  effort  made  on  the 
part  of  the  assured  to  claim  more  than  a  just  measure  of 
indemnity  under  such  conditions  as  to  disclose  an  intent 
to  get  more  than  the  true  amount.  These  adjustments 
have  then  been  made  according  to  the  facts;  but  on  the 
expiration  of  the  policies,  the  representatives  have  been 
informed  that  they  could  not  remain  members  of  the  mutual 
companies. 

The  general  conclusions  to  which  the  writer  has  been 
led  are,  that  it  is  necessary  for  the  conduct  of  mutual 
insurance  to  be  as  well  assured  of  the  quality  of  the  man- 
agement and  the  men  in  charge  as  of  the  risk  itself.  Al- 
though this  discrimination  has  formed  a  constant  part  of 
the  duties  of  the  executive  officers,  we  have  reached  a 
general  conclusion  that  there  is  much  less  loss  from  fires 
intentionally  set  in  order  to  collect  the  insurance  money 
or  from  incendiarism,  than  is  commonly  imputed  to  these 
causes.  I  am  also  well  satisfied  that  when  losses  that 
have  occurred  are  taken  up  by  the  underwriters  with  the 
intention  of  paying  a  just  measure  of  indemnity,  any  effort 
on  the  part  of  the  assured  to  secure  a  larger  payment  is 
uncommon. 


FACTORY  MUTUAL  FIRE  INSURANCE  281 

I  think  it  never  occurred  to  the  founders  of  the  mutual 
system  and  I  am  sure  that  it  had  not  occured  to  myself, 
that  we  were  engaged  in  developing  an  applied  science, 
not  only  of  the  utmost  importance  to  the  economy  and 
safety  in  the  factory  system,  but  which  may  slowly  be  of 
great  service  in  putting  a  stop  to  the  destructive  fire  tax 
of  the  country.  It  may  therefore  be  useful  to  put  upon 
record  the  gradual  growth  of  our  work  until  its  true  scope 
was  almost  forced  upon  our  minds  in  the  process  of  work- 
ing it  out. 

Careful  records  had  been  kept  by  the  late  William  B. 
Whiting,  of  the  incidents  of  each  fire  which  had  occurred 
during  his  official  connection  with  the  company  for  nearly 
the  whole  of  the  first  thirty  years,  and  I  was  enabled  to 
recover  some  accounts  of  the  few  fires  of  any  importance 
that  had  occurred  before  his  time.  These  fires  and  their 
causes  were  tabulated. 

The  first  fact  which  was  disclosed  was  the  large  number 
of  fires  and  the  large  amount  of  losses  attributed  to  broken 
lanterns.  This  led  to  an  examination  of  all  the  lanterns 
in  mill  use,  then  wholly  supplied  with  animal  oils.  Not  a 
single  safe  lantern  could  be  found  in  use.  All  were  badly 
made,  liable  to  melt  at  the  joints  and  insufficiently  guarded. 
On  searching  for  good  lanterns  none  could  be  found  except 
expensive  brass  lanterns  made  for  the  railway  service. 
Warnings  were  given,  due  precautions  taken,  and,  in  con- 
nection with  the  firm,  now  called  the  F.  0.  Dewey  Company, 
safe  lanterns  at  moderate  cost  were  invented,  but  it  took 
five  years  to  perfect  this  apparently  simple  device.  Many 
improvements  have  been  made  and  there  are  now  two  or 
three  types  of  safe  and  suitable  lanterns  for  mill  use, 
burning  either  animal  oil,  mixed  oils,  or  mineral  oils. 
Since  that  study  of  the  lantern  question  there  has  not 
been  a  loss  of  any  considerable  amount  in  any  of  the  works 
insured  by  this  company  which  could  be  reasonably  attrib- 
uted to  fault  in  the  lantern.  Careful  attention  to  lanterns 
would  doubtless  save  many  fires  and  losses  in  city  ri.sks. 


282  YALE  READINGS  IN  INSURANCE 

but  what  owner  or  occupant  ever  gives  his  personal  atten- 
tion to  this  insignificant  cause  of  very  heavy  losses? 

The  second  great  cause  of  fires  was  found  in  the  various 
oils  in  use  both  for  lubrication  and  for  smearing  wool. 
The  mineral  oils  were  largely  used  for  lubrication;  mixed 
oils  were  also  used,  but  in  the  finest  work,  especially  in 
weaving,  fine  sperm  oil  was  still  assumed  to  be  the  only 
suitable  oil.  In  smearing  wool,  olive  oil,  lard  oil  and  mix- 
tures under  fancy  names  more  or  less  liable  to  spontaneous 
combustion  were  in  use. 

The  spontaneous  combustion  of  waste  had  previously 
been  one  of  the  principal  causes  of  loss  by  fire.  This 
danger  has  been  almost  wholly  removed  from  cotton 
factories  by  the  substitution  of  the  mineral  or  so-called 
paraffine  oils  for  lubrication,  in  place  of  animal  oils,  the 
mineral  oils  having  no  affinity  for  oxygen.  Our  investi- 
gation of  oil  disclosed  the  fact  that  33  per  cent,  of  mineral 
oil,  mixed  with  lard  oil,  would  overcome  the  tendency  to 
spontaneous  combustion.  But  these  mixtures  do  not  serve 
in  machine  tool  work.  Therefore,  there  is  still  a  liability 
to  the  spontaneous  combustion  of  waste  used  in  wiping 
tools  in  the  repair  shops  of  the  textile  factories,  where 
pure  lard  oil  must  still  be  used  on  the  cutting  tools,  also 
in  all  our  machine  and  metal-working  risks.  The  liability 
to  spontaneous  combustion  in  woolen  mills  has  been  very 
much  reduced  since  methods  were  discovered  for  scouring 
wool,  treated  with  mixed  oils,  partly  consisting  of  the 
mineral  oils. 

Another  singular  cause  of  loss  was  the  pitched  roof  of 
factories,  commonly  called  the  barn  roof.  When  this 
roof  was  substituted  for  the  old  style  factory  roof,  the 
practice  was  common  to  put  vertical  sheathing  a  few  feet 
from  the  joining  of  the  roof  with  the  floor,  making  a 
long  hollow  space  behind  the  ceiling  at  the  eaves.  This 
was  at  the  time  when  nothing  but  animal  oils  were  used 
for  lubrication,  when  waste  was  therefore  liable  to  spon- 
taneous   combustion.     Several    roofs    were    burned.     At 


FACTORY  MUTUAL  FIRE  INSURANCE  283 

length  one-half  of  the  roof  of  a  mill  was  burned,  the  fire 
being  stopped  by  the  tower.  It  then  occiirred  to  some 
one  to  investigate  the  conditions  of  the  unburned  part, 
and  behind  the  sheathing  were  found  large  numbers  of 
rats'  nests  made  of  oily  waste.  The  cause  of  the  fh^e 
then  became  plain,  —  the  spontaneous  combustion  of 
rats'  nests.  Wlien  this  fault  was  discovered  all  these 
sheathings  were  removed,  and  the  space  was  kept  open 
over  the  whole  area  of  the  attic  floor.  That  barn  roof 
is  no  longer  tolerated. 

Many  destructive  fires  had  originated  from  hot  bearings, 
especially  on  main  shafts.  The  first  fire  which  called 
attention  to  this  cause  occurred  in  a  basement  weaving 
room  two  hundred  feet  long,  from  a  hot  bearing  at  one 
end  of  the  room.  The  fire  jumped  from  loom  to  loom, 
passing  many,  melting  the  solder  of  a  gas  meter  at  the 
further  end,  without  scorching  a  towel  hanging  closely 
underneath.  This  led  to  a  suspicion  of  evaporation, 
it  being  assumed  that  the  heavy  hydrocarbon  vapors 
had  been  kept  in  flakes  or  planes  in  the  atmosphere  by  the 
motion  of  the  looms.  On  examining  the  oil,  it  proved  to 
evaporate  24  per  cent,  in  ten  hours  at  a  heat  of  140°; 
that  being  a  heat  not  infrequently  attained  on  a  heavy 
bearing.  Samples  were  called  for  from  various  mills.  A 
tabulation  was  made  of  nearly  one  hundred  cotton-mills, 
which  proved  a  very  gi-eat  variation  in  the  cost  of  oil  to  a 
pound  of  cloth  in  the  quantity  of  oil  used  for  lubrication, 
and  in  the  prices  paid  for  the  oils. 

In  fifty-five  mills  on  print  cloth  numbers,  among  which 
there  was  no  good  reason  for  any  variation  in  the  cost  of 
lubrication,  the  average  price  paid  for  oil  varied  from 
29  cents  per  gallon  to  $1.05.  The  gallons  of  oil  to  a  thou- 
sand pounds  of  cloth  varied  from  1.3  to  2.84.  The  cost 
of  oil  per  thousand  pounds  of  cloth  varied  from  68  cents 
to  $2.58.  There  was  no  apparent  relation  of  price,  quan- 
tity, or  cost  each  to  the  other.  This  table  was  printed 
without  giving  the  names  of  the  mills,  and  submitted  to 


284  YALE  READINGS  IN  INSURANCE 

all  the  contributors,  each  with  a  key  to  his  own  number. 
The  conclusion  reached  by  all  was  that  each  knew  little 
about  the  subject,  while  the  rest  knew  less,  and  I  concluded 
for  myself  that  I  knew  nothing,  and  that  it  was  time  to 
bring  lubrication  to  a  science  if  it  were  possible.  This 
was  fairly  accomplished.  The  mineral  lubricating  oils  are 
now  made  of  various  qualities  more  or  less  fluid  and  more 
or  less  filtered,  but  the  prices  range  from  a  minimum  of 
13  cents  to  a  maximum  of  30  cents  for  such  oils  as  are 
made  use  of  on  ordinary  cotton  machinery.  What  the 
relative  quantity  used  in  recent  years  is  I  have  no  means 
of  ascertaining. 

The  investigation  was  followed  up  until  it  proved  that 
there  was  but  one  well-distilled  and  safe  mineral  oil  for 
lubrication  to  be  found,  that  being  made  under  a  patent. 
In  all  the  rest  grave  faults  were  discovered,  mainly,  that 
of  rapid  evaporation.  Notice  was  immediately  given  to 
the  makers  of  these  oils  that  a  warning  would  be  published 
to  all  our  members  not  to  buy  them  or  to  use  them  under 
any  circumstances.  This  led  to  a  threat  of  a  suit  at  law 
for  interfering  with  their  business,  which  I  immediately 
urged  them  to  enter  in  court,  as  I  desired  to  publish  the 
facts;  but  I  advised  them  to  settle  the  patent  rights  and 
to  change  their  methods  of  distillation,  which  advice  was 
taken.  A  year  later,  wishing  to  secure  some  of  the  vola- 
tile oil  for  experimental  purposes  none  could  be  found  in 
the  market.  The  price  and  cost  of  lubricating  oil  were 
very  greatly  reduced,  all  oils  being  brought  to  a  uniform 
standard ;  very  great  benefit  in  money  and  increased  safety 
have  since  ensued.  From  the  conclusion  of  that  investi- 
gation to  the  present  time  serious  losses  from  hot  bearings 
have  been  very  rare;  in  fact,  there  is  not  one  of  any 
moment  on  our  record  that  I  can  recall. 

Several  members  reported  to  me  that  their  saving  in 
the  cost  of  lubricants  in  the  next  two  years,  resulting  from 
this  study,  had  been  more  than  the  cost  of  their  insurance 
in  the  same  period. 


FACTORY  MUTUAL  FIRE  INSURANCE  285 

A  warning  was  also  given  on  the  reckless  use  of  very 
combustible  varnishes  on  wooden  surfaces,  over  which 
fire  will  pass  with  the  speed  of  a  race-horse,  and  may  be 
ignited  by  the  slightest  cause.  Care  should  also  be 
given  to  the  quality  of  the  materials  which  are  used  in 
treating  the  surfaces  of  unpainted  wood  in  offices  and 
dwelling  houses,  which  are  apt  to  be  rubbed  down  with 
rags  impregnated  with  very  dangerous  materials  of  which 
linseed  oil  is  almost  sure  to  be  one  of  the  ingredients. 
Two  instances  have  occurred  in  dwellings  of  my  personal 
friends  where  these  rags,  put  away  m  the  pantry  drawers, 
have  set  the  house  on  fire. 

After  testing  and  rejecting  every  existing  kind  of  appa- 
ratus for  ascertaining  the  coefficient  of  friction,  an  instru- 
ment was  invented  by  Professor  Ordway  on  which  exact 
results  were  secured.  That  was  afterward  improved  in 
some  measure,  and  is  now  in  the  laboratory  of  the 
Institute  of  Technology.  We  may  claim  that  lubri- 
cation has  become  an  applied  science  from  this  investiga- 
tion. 

Methods  of  lighting  were  taken  up  at  a  very  early  date. 
lUmiiinating  gas  was  mainly  in  use.  There  had  been 
very  serious  fires  and  heavy  losses,  coupled  with  the  loss 
of  life,  from  the  breaking  of  gas  pipes  during  fires,  throw- 
ing large  volumes  into  burning  buildings.  Attention  was 
immediately  given  to  outside  gates  or  valves  and  to  right 
methods  of  cutting  off  the  gas  at  the  outbreak  of  a  fire, 
which  were  wholly  wanting  in  many  cases. 

At  one  period  there  were  upon  our  books  one  hundred 
and  fifty  risks  or  more  lighted  by  kerosene  oil  lamps. 
There  had  never  been  any  considerable  loss  from  this 
cause,  except  from  bad  lanterns,  although  many  of  the 
lamps  were  unsuitable.  Measures  were  taken  to  substi- 
tute safe  lamps  and  burners  for  the  poor  ones.  Atten- 
tion was  giv(ui  to  the  quality  of  the  oil  in  use  and  the  very 
cheap  and  dangerous  tubular  lanterns  were  thrown  out, 
safe  ones  being  substituted.    The  number  of  mills  lighted 


286  YALE  READINGS  IN  INSURANCE 

in  this  way  is  now  much  reduced,  electric  lighting  having 
been  substituted.  But  from  that  time  to  the  present  there 
has  been  no  considerable  loss  of  any  kind  from  this  cause, 
and  only  one  loss,  slightly  exceeding  one  thousand  dollars, 
which  could  be  attributed  to  the  use  of  kerosene  oil;  that 
was  caused  by  the  breaking  of  a  bad  lantern  brought  into 
the  yard  from  the  outside  by  a  workman  without  the 
knowledge  of  the  agent. 

The  next  subject  investigated  was  the  fire-door.  The 
record  showed  that  iron  doors  had  failed;  one  of  the  heavi- 
est losses  previously  on  record  having  happened  from  the 
warping  of  the  iron  fire-door  which  separated  the  picker 
department  from  the  main  mill,  the  fire  passing,  and  the 
mill  being  destroyed.  Efforts  had  been  made  to  intro- 
duce the  tin-clad  wooden  door,  but  it  was  often  badly 
made  for  want  of  proper  instructions.  The  sliding  door 
had  been  put  in  position  by  Mr.  Byron  Weston.  The 
writer  invented  an  automatic  method  of  closing  doors, 
shutters,  and  hatches  in  rather  a  clumsy  way,  since  very 
much  improved;  he  fortunately  used  a  lever  released  by 
the  melting  of  fusible  solder  in  that  undertaking  and  in 
the  construction  of  a  valve  for  the  conversion  of  a  per- 
forated pipe  into  an  automatic  sprinkling  system. 

The  next  subject  taken  up  was  fire  hose.  The  practice 
of  the  makers  of  unsafe  hose  was  to  recommend  to  the 
owners  to  hang  up  cheap  hose  "in  order  to  satisfy  the 
insurance  inspectors."  Much  of  it  proved  worthless.  A 
thorough  investigation  was  made,  and  information  was 
given  to  all  members  as  to  whom  they  could  trust  in  the 
purchase  of  hose.  This  work  has  been  subsequently  ex- 
tended by  the  establishment  of  types  of  hose  designated 
as  the  "underwriter"  hose,  which  can  be  readily  identi- 
fied. But  incautious  persons  are  still  apt  to  be  cheated 
on  low-priced  hose  offered  them  at  less  than  any  possible 
cost  for  hose  of  a  suitable  kind.  How  many  owners  or 
occupants  of  city  buildings  ever  give  any  attention  to 
their  fire  hose,  except  to  see  that  there  is  enough  cheap 


FACTORY  MUTUAL  FIRE  INSURANCE     287 

hose  hung  up  "to  satisfy  the  inspectors  of  the  insurance 
companies"? 

The  general  question  of  the  proper  height  and  the 
right  construction  of  factory  buil(hngs  received  very  early 
attention.  There  were  then  several  examples  of  the  eight 
or  nine-story  factory  building  surmounted  by  the  early 
type  of  the  so-called  factory  roof;  the  roof  itself,  in  some 
instances,  being  two  stories  in  height.  One  large  risk  in 
part  under  these  conditions  was  dropped  as  soon  as  cir- 
cumstances would  permit,  the  worst  building,  a  large  one, 
having  soon  after  burned.  In  another  instance  the  owners 
were  induced  to  remove  the  two-story  roof  and  to  put  on 
timber  and  plank  at  the  level  of  the  sixth  story,  making 
place  for  the  machinery  previously  in  the  upper  stories 
on  the  ground.  After  the  work  had  been  done  it  was 
justified,  not  only  by  increased  safety  but  by  the  greater 
economy  in  the  work  of  the  factory. 

Many  other  risks  were  covered  in  by  the  pitched  or 
barn  roof,  slated  —  a  very  bad  type.  Later  came  one 
of  the  worst  inventions  in  combustible  architecture,  the 
so-called  Mansard,  or  French  roof.  By  persistent  action 
we  have  secured  the  removal  of  many  of  these  roofs,  with 
great  benefit  to  owners  in  the  conduct  of  manufacturing 
and  very  much  greater  safety. 

A  bad  plan  for  the  construction  of  paper  mills  had  been 
long  in  practice,  under  the  assumed  necessity  of  having 
a  long,  hollow  roof  over  the  Fourdrinicr  machines  in  order 
to  prevent  condensation  of  moisture  over  the  machines, 
which  was  one  of  the  worst  features  of  these  risks.  The 
losses  on  paper-mills  had  been  far  in  excess  of  the  average 
loss  on  other  risks.  It  therefore  became  necessary  either 
to  induce  the  owners  to  remedy  the  faults  of  construction, 
or  else  to  drop  the  risks.  The  foi'mer  course  was  taken, 
rates  being  advanced  in  the  interval,  and  the  Paper-Mill 
Mutual  Company  was  organized,  so  that  owners  could  be 
trained  as  directors  in  the  right  construction  and  protec- 
tion of  their  own  risks.     This  action  led  to  a  complete 


288  YALE  READINGS  IN  INSURANCE 

revolution  in  the  layout  and  construction  of  paper-mills, 
and  this  change  has  been  justified  not  only  by  the  greater 
safety  of  the  works,  but  by  very  great  improvement  in 
the  methods  of  handling  the  stock.  During  the  last  ten 
years  this  company  has  not  met  a  loss  exceeding  $5000 
on  any  paper-mill. 

Fires  from  the  ignition  of  bituminous  coal  attracted 
our  attention.  It  proved  that  there  was  but  one  variety 
of  coal  which  had  not  taken  fire,  and  since  a  preference 
or  condition  for  the  use  of  that  coal  would  have  given  the 
owners  a  monopoly,  costing  consumers  much  more  than 
any  possible  loss  on  the  coal  itself  from  spontaneous  igni- 
tion, it  was  decided,  with  the  assent  of  all  parties  in  inter- 
est, not  to  insure  bituminous  coals  against  their  own 
inherent  hazard,  maintaining  the  insurance  of  the  property 
endangered  by  this  cause  of  fire.  Actual  loss  of  calorific 
value  by  the  slow  coking  of  a  pile  of  coal  is  not  very  great, 
although  it  has  sometimes  made  a  great  deal  of  trouble 
in  mill  yards.  Our  present  system  is  fully  justified  and 
has  worked  to  the  mutual  benefit  of  our  members.  In  this 
connection  it  may  be  related  that  we  shall  presently  be 
able  to  present  a  report  on  fire  retardent  materials  for 
wooden  surfaces,  which  can  be  very  cheaply  applied  to  the 
wooden  posts,  which  have  not  infrequently  burned  off  in 
the  coal  piles,  and  which  will  entirely  obviate  that  danger. 

Among  the  earlier  lines  of  investigation  was  the  test 
of  the  strength  of  wooden  posts.  The  common  practice 
had  been  to  turn  these  posts,  tapering  from  the  base 
toward  the  top;  this  was  a  waste  of  material  and  weaken- 
ing of  strength  without  any  sound  reason.  Our  tests 
proved  the  superiority  of  the  square  posts,  chamfered  off 
at  the  corners,  with  hole  bored  through  the  center,  and  a 
crossway  hole  near  the  top  and  bottom  to  ventilate  and 
season  the  timber.  This  was  followed  by  further  tests 
of  the  strength  of  timbers,  and  the  layout  of  plans  for  the 
construction  of  cotton  factories  consistently  with  the 
rather    light    weights    per    square    foot    of    floor    which 


FACTORY  MUTUAL  FIRE  INSURANCE  289 

are  found  in  this  branch  of  industry.  Other  general 
plans  for  machine  shops,  paper-mills,  etc.,  are  also  kept  in 
stock. 

What  the  factory  mutual  companies  have  attempted 
is  to  give  a  proper  direction  to  the  use  of  timber,  plank, 
brick,  and  concrete,  so  disposed  that  with  proper  apparatus 
fires  may  be  reached  in  the  beginning,  or  may  be  controlled 
before  they  attain  destructive  headway.  Had  we  not  been 
enabled  to  compass  low  cost  and  economy  in  construc- 
tion with  adequate  security  against  loss  by  fire,  we  should 
never  have  been  able  to  accomplish  the  work  which  has 
been  done.  I  have  often  asked,  what  has  been  the  cost 
of  fire  protection  in  buildings  rightly  constructed  accord- 
ing to  our  plans?  It  is  not  possible  to  give  a  positive 
answer  to  that  question  because  the  conditions  vary  with 
the  different  arts.  In  that  branch  of  industry  with  which 
the  factory  system  originated,  namely,  the  manufacture 
of  cotton,  the  conditions  also  vary  very  considerably, 
although  not  in  so  great  a  measure.  We  are  accustomed 
to  make  all  our  computations  of  the  cost  of  buildings,  the 
appraisements  for  insurance  and  fire  protection  by  the  unit 
of  the  square  foot  of  occupied  floor ;  that  is  to  say,  of  floor 
put  to  use  in  the  manufacturing  operations,  in  hallways, 
stairways,  elevators,  and  the  like,  not  including  unoccu- 
pied basements  unfit  to  be  used  which  ought  never  to  be 
tolerated  anywhere.  On  this  basis  a  tolerable  average 
may  be  named.  The  average  cost  of  adequate  pumps, 
pipes,  and  hydrants  within  mill  yards,  not  including  outside 
connections  or  outside  reservoirs,  will  not  exceed  5 
cents  per  square  foot  of  floor,  and  may  often  be  put  in 
position  at  less,  any  excess  being  due  to  extraordinary 
conditions.  The  cost  per  square  foot  of  floor  of  auto- 
matic sprinklers  may  be  put  at  an  average  of  3  cents. 
The  entire  cost  will  range  from  a  minimum  of  0  under 
favorable  conditions  to  8  cents  under  conditions  which 
may  not  infrequently  arise.  In  ratio  to  values  this  aver- 
age expenditure  would  stand  at  not  exceeding  H  per  cent. 


290  YALE  READINGS  IN  INSURANCE 

for  the  pump,  pipe,  and  hydrant  service,  and  at  an  average 
of  1  per  cent,  for  the  sprinliler  service.  The  cost  per 
spindle  w\\\  vary  with  fine  or  coarse  work. 

One  of  the  most  useful  functions,  still  continued  in  the 
physical  laboratory,  is  the  test  and  warning  against  fraud- 
ulent and  dangerous  claims  or  substances.  This  work 
has  been  especially  effective  in  dealing  with  fancy  oils  and 
mixtm-es,  belt  dressings,  lamps,  heavy  gases,  or  mechan- 
ical mixtures  of  naphtha  or  gasoline  with  air,  claims  for 
improvement  in  making  steam,  fire-proof  material  so- 
called,  and  other  matters. 

The  writer  may  hope  that  this  record  of  progress  in 
what  may  now  be  justly  called  the  science  of  preventing 
loss  by  fire  will  have  some  influence  outside  the  lines  of 
the  factory  mutual  companies.  The  present  condition 
of  the  country  in  respect  to  loss  by  fire  and  contracts  of 
indemnity  given  by  insm-ance  companies  is  somewhat 
alarming.  All  insurance,  under  whatever  name,  is  a 
mutual  contract  to  pay  indemnity.  Under  the  stock 
system  the  capital  serves  only  as  a  guarantee.  It  must 
never  be  impaired  in  any  great  measure  for  the  payment 
of  losses  and  expenses.  The  losses  and  expenses  must  be 
covered  by  the  premiums  put  in  by  the  assured,  and  it 
is  as  impossible  for  an  insurance  company  to  give  con- 
tracts of  indemnity  on  less  than  cost  for  any  long  period 
of  time  as  it  is  impossible  for  a  factory  to  make  and  sell 
goods  at  less  than  cost  without  bankruptcy.  The  saga- 
cious managers  of  all  insurance  companies  are  now  seeking 
for  a  remedy  for  the  present  dangerous  conditions  of  under- 
writing. The  ash  heap  due  to  loss  by  fire,  the  excessive 
cost  of  fire  departments  due  to  bad  building  and  bad 
occupancy,  and  the  cost  of  sustaining  the  insurance  system 
of  the  country  combined,  coupled  with  the  excessive  de- 
mands for  additional  water  supplies  for  fire  purposes 
only,  cannot  amount  to  less  than  $200,000,000  a  year, 
and  is  probably  much  more. 

I  can  find  no  trace  of  any  annual  profit  on  the  entire 


FACTORY  MUTUAL  FIRE  INSURANCE  291 

business  of  the  nation  which  would  warrant  us  in  estima- 
ting tlie  addition  to  tlie  capital  or  savings  of  the  people 
of  this  country,  exceeding  $1,500,000,000  even  in  a  pros- 
perous year.  It  is  probably  less.  It  follows  that  the  fire 
tax  is  certainly  equal  to  10  per  cent,  upon  any  possible 
profit  of  the  nation,  and  is  probably  15  per  cent.  It  is 
equal  to  the  normal  cost  of  conducting  the  government  of 
the  United  States  under  normal  conditions,  aside  from 
pensions  and  interest  on  the  national  debt,  that  normal 
rate  bemg  $2.50  per  head,  amounting  last  year,  on  a  peace 
basis,  to  a  less  sum  than  this  fire  tax. 

What  is  to  be  done  to  meet  this  waste?  For  the  last 
ten  yeai's  the  representatives  of  the  stock  fii-e  insurance 
companies,  especially  in  Boston,  have  made  consistent, 
intelligent,  and  determined  efforts  to  bring  about  a  change, 
and  in  some  cities  great  progress  has  been  made  in  pre- 
venting loss,  notably  in  this  city  of  Boston.  But  in  some 
other  cities  the  danger  of  a  most  destructive  conflagration 
still  exists,  and  it  is  probably  only  a  question  of  time  when 
such  a  conflagration  will  occur,  rendering  a  large  part  of 
the  stock  insurance  companies  bankrupt  which  may  have 
large  lines  in  such  cities.  Without  those  large  lines  of 
insurance  their  business  could  not  be  conducted  under 
existing  conditions.  This  danger  of  most  destructive 
conflagrations  can  neither  be  met  by  legislation  nor  by 
insurance  companies.  The  owners  and  occupants  of 
these  dangerous  and  combustible  buildings  and  districts 
are  responsible  for  this  great  danger  and  must  pay  the 
penalty;  until  they  act  in  combination  under  intelligent 
advisers  big  fires  are  their  own  fault. 

Although  the  method  of  granting  contracts  of  indem- 
nity by  the  factory  mutual  companies  must,  of  necessity, 
be  limited  to  special  establishments,  each  carefully  guarded 
from  the  other  and  fitted  with  its  own  apparatus  for  the 
extinction  of  fire,  yet  there  are  vast  fields  not  yet  covered 
by  this  mutual  method.  The  more  hazardous  the  work, 
the  more  reason  for  adopting  this  system  of  i)reventing 


292  YALE  READINGS  IN  INSURANCE 

loss.  All  the  wood-working  establishments  and  many 
other  branches  of  industry  might  be  combined  in  the  same 
way ;  the  only  thing  necessary  being  to  overcome  the  antag- 
onism with  which  owners  usually  regard  the  underwriters, 
and  to  bring  them  together  as  co-partners,  under  a  sufficient 
deposit,  each  sustaining  the  other  in  the  effort  to  find 
out  the  causes  of  danger  and  to  remove  them. 

A  mutual  insurance  company  might  be  organized  for 
the  insuance  and  prevention  of  fire  in  church  buildings. 
We  burn  11.36  churches  per  week  in  the  United  States. 
By  combination  for  mutual  insurance  the  church  mem- 
bers might  be  assured  against  cremation  in  this  world,  if 
not  in  the  next. 

A  very  large  part  of  the  great  shops  and  department 
stores  are  badly  planned,  little  consideration  having  been 
given  in  their  construction  to  danger  of  fire,  except  in 
some  cases  in  choosing  the  material  of  which  the  buildings 
are  constructed.  Fires  have  spread  with  extreme  rapid- 
ity over  open  stocks,  even  in  fire-proof  buildings,  so-called, 
in  which  there  have  been  many  openings  or  stairways 
passing  from  one  floor  to  another,  to  the  complete  destruc- 
tion of  the  contents.  The  factory  underwriters  regard  the 
vertical  hazard  much  greater  than  the  horizontal  hazard. 
They  are  obliged  to  deal  with  very  large  floor  areas,  very 
often  of  one  acre  each,  sometimes  much  larger,  covered 
with  combustible  material.  But  since  the  introduction 
of  automatic  sprinklers  all  fires  have  been  stopped  with 
moderate  loss  from  any  great  horizontal  spread.  No  fire 
has  passed  from  one  floor  to  another,  in  any  building 
insured  under  the  supervision  of  the  undersigned,  by  burn- 
ing away  the  thick  plank  floor  in  any  working  department 
of  any  mill.  In  one  instance,  a  fire  originating  at  the 
bottom  of  a  pile  of  jute  in  a  storehouse  burned  through 
the  floor,  making  a  porthole  through  which  a  stream  of 
water  was  thrown  to  the  heart  of  the  fire.  The  fires 
which  have  passed  upward  or  downward  from  floor  to 
floor  have  passed  either  through  belt  openings  which  are 


FACTORY  MUTUAL  FIRE  INSURANCE  293 

now  nearly  abolished,  or,  getting  by  the  doorways,  have 
passed  through  the  elevator  shafts  or  stairways. 

The  true  model  of  a  great  department  store  may  at 
some  future  date  be  a  building  without  any  windows  in 
the  walls  except,  perhaps,  in  the  upper  story,  if  a  top  or 
roof  light  does  not  suffice  to  show  goods  for  which  daylight 
is  needed,  electricity  serving  to  give  light,  and  a  forced 
circulation  of  air  warmed  and  cleansed  giving  better 
ventilation  than  can  be  attained  by  opening  or  closing 
windows.  Such  an  establishment  might  be  built  with  pas- 
sages from  floor  to  floor  in  separate  towers,  or  stair  cham- 
bers at  each  corner,  each  carefully  cut  off  at  each  floor  by 
automatic  fire-doors  and  with  no  other  openings  from 
floor  to  floor.  The  latest  storehouses  in  cities,  where  nar- 
row areas  make  it  necessary  to  construct  buildings  of 
many  stories  in  height,  have  been  built  substantially  on 
this  plan.  This  may  seem  a  somewhat  visionary  idea, 
but  what  stands  in  the  way?  If  show  windows  are  needed 
around  the  lower  story,  they  can  be  cut  off"  by  fire-proof 
walls  and  ceilings  from  the  interior,  lighted  and  protected 
separately  from  the  main  building  and  entered  from  the 
towers. 

While  it  ma3^  not  be  possible  to  apply  all  the  rules  and 
methods  to  the  miscellaneous  hazards  of  a  city,  yet  a  very 
large  part  of  the  safeguards  which  arc?  required  by  the 
mutual  companies,  as  a  condition  of  insuring  property, 
have  been  brought  into  use  for  the  protection  of  the  com- 
mercial hazards  of  cities  and  can  be  extended  rapidly 
when  owners  and  occupants  can  be  aroused  to  the  neces- 
sity. 


CHAPTER  XVII 

HISTORY   OF   MARINE    INSURANCE^ 

In  discussing  marine  insurance  one  deals  with  a  subject 
far  more  technical  and  complex  than  any  other  system  of 
indemnity.  Fire  insurance  provides  against  loss  occa- 
sioned by  a  single  occurrence.  Life  insurance  insures 
against  an  event,  the  occurrence  of  which  is  inevitable, 
and  the  risk  concerning  which  has  been  approximately 
measured  by  the  application  of  the  law  of  average  to 
accumulated  data.  Marine  insurance,  however,  under- 
takes to  indemnify  a  person  against  the  loss  of  ship,  goods, 
freight,  anticipated  profits,  or  any  other  insurable  interest, 
through  any  of  the  numerous  perils  and  adventures  con- 
nected with  navigation,  such  as  the  perils  "of  the  sea," 
fires,  collisions,  pirates,  thieves,  seizures  and  restraints, 
jettisons,  barratry  of  the  master  or  mariners,  and  all  other 
perils,  losses  or  misfortunes  which  might  be  assumed  by 
the  policy. 

While  determined  efforts  have  been  made  for  years,  and 
with  success,  to  place  the  prosecution  of  life  and  fire  in- 
surance upon  a  scientific  basis,  this  can  scarcely  be  said 
of  marine  underwriting.  Some  of  our  leading  marine  com- 
panies, it  is  true,  do  possess  a  large  mass  of  experience 
which  is  used  as  a  basis  in  computing  rates.  Yet  it  is 
also  true  that,  taking  the  business  as  a  whole,  there  is 
no  other  branch  of  insurance  in  which  success  is  so  largely 

1  By  Solomon  Heubner,  Assistant  Professor  of  Political  Economy, 
University  of  Pennsylvania.  Reprinted  from  pages  421-452,  Vol. 
XXVI,  Annals  of  the  American  Academy  of  Political  and  Social 
Science. 

294 


HISTORY  OF  MARINE  INSURANCE  295 

dependent  upon  the  native  sagacity,  the  keenness  for  obser- 
vation, and  the  general  speciaUzed  abiUty  of  the  individual 
underwriter  to  know  not  only  men,  but  the  effect  of  climate, 
seasons,  geographical  localities  and  numerous  other  con- 
siderations upon  any  of  a  large  number  of  risks,  as  in 
marine  insurance.  To  a  very  large  extent  the  business 
is  inherently  a  system  of  estimates,  and  the  importance 
of  the  personal  qualities  of  the  underwriter  cannot  be 
over  emphasized. 

It  is  this  complex  nature  of  the  business  which  is  no 
doubt  responsible  for  the  fact  that  marine  insurance  is 
to-day  a  comparatively  little-known  business  to  the  gen- 
eral public.  Consult  any  of  our  leading  insurance  jour- 
nals, and  a  score  or  more  of  pages  will  be  found  dealing 
with  other  lines  of  insurance  for  one  dealing  with  this, 
the  oldest  and  possibly  the  most  interesting,  and,  in  many 
particulars,  equally  important  branch.  This  compara- 
tive absence  of  notice,  however,  should  not  cause  us  to 
overlook  the  fact  that  in  this  country  alone,  between  six 
and  seven  billion  dollars  worth  of  property  is  insured 
by  marine  companies,  and  that  it  is  through  this  form 
of  insurance  that  participation  in  commerce  becomes 
general  and  continuous.  It  is  not  to  be  sujDposed  that 
people  would  risk  their  fortunes  in  enterprises  surrounded 
with  so  many  dangers  as  mercantile  ventures,  were  it 
not  for  the  indemnifying  contract,  while  in  distributing 
the  loss  of  a  few  among  the  many,  removes  the  sense  of 
fear  and  makes  the  mercantile  industry  one  of  certainty 
in  its  results  instead  of  a  half-gambling  enterprise.  As  a 
prominent  writer  on  mercantile  affairs  correctly  statc^^: 
"Marine  insurance  bears  to  commerce  the  relation  of 
body-guard  rather  than  of  mere  servile  attendant.  .  .  . 
Of  the  active  forces  which  influence,  control,  or  forbid  the 
employment  of  shipping,  none  have  greater  effect  than 
the  marine  insurance  power."  ^  Marine  underwriting  may 
indeed  be  characterized  as  just   as  much  an  instrumen- 

1  William  W.  Bates.     The  "  American  Marine,"  p.  219. 


296  YALE  READINGS  IN  INSURANCE 

tality  of  commerce  and  almost  as  necessary  to  navigation 
as  the  ship  itseh'.  It  is  universally  recognized  as  a  most 
important  factor  in  trade  and  transportation,  and  in 
modern  commerce  is  of  the  utmost  utility.  To  this  may 
be  added  that,  as  the  methods  of  conducting  oversea 
trade  are  being  constantly  transformed,  marine  insurance 
is  becoming  an  increasingly  important  adjunct  of  com- 
merce. As  Mr.  Gow  correctly  says:  "Wlien  large  trans- 
actions are  worked,  as  is  now  extremely  common,  with 
credits  and  margins,  the  amount  of  the  premium  of  insur- 
ance is  often  the  item  that  decides  whether  some  venture 
will  be  attempted  or  not.  The  protection  which  marine 
insurance  affords  is  now  usually  regarded  as  an  absolute 
necessity  to  the  oversea  merchant;  and  thus  by  degrees 
marine  insurance  has  become  in  one  shape  or  another  an 
integral,  almost  an  essential,  factor  in  oversea  commercial 
transactions."^ 

The  practice  of  marine  insurance  may  be  regarded  as 
the  earliest  form  of  indemnity,  antedating  other  kinds  of 
insurance  by  many  hundred  years.  Even  centuries  before 
the  introduction  of  marine  underwriting  as  we  know  it 
to-day,  the  commercial  nations  of  the  ancient  world  se- 
cured the  benefits  of  insurance  through  the  so-called  "loans 
on  bottomry,"  e.g.  loans  made  on  the  security  of  the  ship 
and  cargo  at  high  rates  of  interest,  and  with  the  under- 
standing that  the  principal  with  interest  was  to  be  repaid 
only  in  the  event  of  the  safe  arrival  of  the  vessel,  and  that 
the  lender  was  to  forfeit  both  principal  and  interest  in  case 
of  loss.  Instead,  then,  of  paying  a  premium  before  start- 
ing the  voyage,  as  is  now  the  case,  and  receiving  the  indem- 
nity after  a  loss  is  incurred  the  insured  under  the  bottomry 
loan  received  the  indemnity  in  advance,  and  only  returned 
the  same  plus  a  premium  after  safe  termination  of  the 
voyage. 

Such  loans  on  bottomry,  we  are  told,  were  especially 
sought  after  and  entered  into  by  members  of  the  Roman 

>  Willam  Gow.     "Marine  Insurance,"  p.  2. 


HISTORY  OF  MARINE  INSURANCE  297 

nobility,  who,  too  proud  to  interest  themselves  directly  in 
commerce,  and  yet  desirous  of  obtaining  large  interest  re- 
turns, could  here  find  a  convenient  method  of  investing 
their  funds  profitably,  and  at  the  same  time  avoid  en- 
gaging personally  in  mercantile  pursuits.  That  such  loans 
were  prevalent  among  the  commercial  peoples  of  early 
history  is  attested  by  the  numerous  references  concerning 
such  transactions  which  are  found  in  the  judicial  and  other 
literature  of  the  Romans.  In  an  edict  of  the  Roman 
Emperor  Justinian  of  a.d.  533,  for  example,  the  rate  of 
premium  on  such  loans  was  fixed  at  12  per  cent.,  implying 
at  least  that  the  practice  must  have  been  very  general  at 
that  time.  Though  indirect  in  form  and  partaking  merely 
of  the  nature  of  quasi-insurance,  this  method  of  indemni- 
fying loss  by  means  of  loans  was  nevertheless  real  insurance 
in  its  results.  It  should  be  borne  in  mind,  however,  that 
this  method  of  indemnification  is  the  only  one  approxima- 
ting modern  insm-ance  of  which  antiquity  furnishes  us  any 
clear  and  direct  evidence.  It  might  seem  remarkable, 
indeed,  that  nations  so  far  advanced  in  their  legal  systems 
as  were  the  Mediterranean  countries,  and  with  such  exten- 
sive commercial  interests,  should  have  left  us  no  direct 
and  conclusive  evidence  to  show  that  they  at  all  under- 
stood marine  insurance  as  it  is  now  practised. 

Marine  insurance  as  it  exists  to-day  originated  at  a  much 
later  date  than  the  loan  on  bottomry.  Evidence  seems  to 
show  that  it  had  its  start  in  Italy,  especially  among  the 
Lombard  merchants,  at  the  close  of  the  twelfth  and  the 
beginning  of  the  thirteenth  century.  From  thence  it 
spread  to  Flanders,  Portugal,  and  Spain  during  the  four- 
teenth and  fifteenth  centuries,  and  was  finally  carried  to 
England  by  the  Lombards  in  the  early  part  of  the  six- 
teenth century.  As  early  as  1601  the  British  Parliament 
declared  marine  insurance  to  have  existed  from  time 
immemorial  (43  Klizal)eth,  C.  12),  and  described  it  as  a 
means  "whereby  it  comcth  to  pass  that  upon  the  loss  or 
perishing  of  any  ship  there  foUoweth  not  the  undoing  of 


298  YALE  READINGS   IN   INSURANCE 

any  man,  but  the  loss  lighteth  rather  easily  upon  many 
than  heavy  upon  few,  and  rather  upon  them  that  adven- 
ture not  than  upon  those  who  do  adventure;  whereby  all 
merchants,  especially  those  of  the  younger  sort,  are  allured 
to  venture  more  willingly  and  more  freely." 

Following  its  introduction  in  England,  marine  insurance 
spread  to  the  various  commercial  centers  of  Europe,  its 
application  becoming  very  general,  if  judged  from  the  con- 
sideration given  to  the  subject  in  the  numerous  commercial 
codes  and  ordinances  of  the  fifteenth,  sixteenth,  and  seven- 
teenth centuries.  Finally,  there  followed  the  epoch-making 
Ordinance  de  la  Marine  of  1681,  which  became  the  model 
for  practically  all  the  modern  codes  of  commercial  law  on 
the  continent,  including  the  law  of  marine  insurance.  In 
England,  on  the  contrary,  the  development  of  the  law 
concerning  sea  insurance  did  not  begin  to  assume  such 
clear  and  definite  form  until  almost  the  middle  of  the 
eighteenth  century.  It  was  then  that  Lord  Mansfield, 
in  his  efforts  to  formulate  the  commercial  law  of  England, 
began  to  draw  his  legal  principles  very  largely  from  the 
commercial  ordinances  and  codes  of  the  continent  with 
a  view  of  applying  them  to  English  conditions.  His 
decisions  practically  constitute  the  foundation  of  marine 
insurance  law  in  England,  and  in  turn  have  become  the 
basis  of  American  decisions.  As  supplementing  this 
lengthy  and  continuous  legal  development,  it  is  important 
to  note  that  the  Lloyd's  policy  prevailing  in  England 
to-day  is  very  similar  to  the  policy  which  was  in  use  in 
the  early  part  of  the  seventeenth  century,  and  that  many 
features  of  the  English  policy  have  in  turn  been  incor- 
porated in  the  policies  used  in  America.  In  other  words, 
we  have  in  marine  insurance  several  centuries  of  usage 
and  judicial  interpretation  relating  to  the  signification  of 
a  single  document. 

Turning  now  to  the  financial  development  of  the  busi- 
ness as  distinct  from  the  legal,  marine  insurance  has 
naturally    reached    its   highest    efficiency    in    the    United 


HISTORY  OF  MARINE  INSURANCE  299 

Kingdom.  Its  history  in  that  country,  whose  merchant 
marine  for  many  decades  comprised  nearly  half  of  the 
ocean-going  tonnage  of  the  world,  has  been  rendered 
famous  by  the  close  identification  of  the  business  with 
the  world  renowned  corporation  of  Lloyds.  This  gigantic 
institution  had  its  origin  in  a  mere  seamen's  coffee  house, 
established  by  an  Edward  Lloyd  near  the  middle  of  the 
seventeenth  century.  This  enterprising  and  energetic 
man,  besides  making  his  coffee  house  a  convenient  place 
of  meeting  of  merchants  and  seamen,  also  created  an 
elaborate  system  of  home  and  foreign  correspondents  to 
supply  him  with  news  from  all  the  leading  ports  of  the 
world  concerning  the  movements  and  character  of  vessels 
for  the  information  of  his  patrons.  In  fact,  at  first  the 
underwriting  of  marine  risks  was  a  subordinate  feature  of 
his  business.  The  sj'^stematic  manner,  however,  in  which 
maritime  information  was  collected  and  disseminated  soon 
won  for  him  a  large  following,  and  made  his  coffee  house, 
among  the  many  others  existing  in  London,  the  principal 
meeting  place  for  merchants  and  professional  underwriters 
who,  unhampered  by  any  rules  or  regulations,  assembled 
there  and  transacted  a  general  marine  business.  Thus  it 
came  to  pass  that  Lloyds  soon  outgrew  its  early  usefulness, 
was  transferred  in  1692  from  its  original  location  in  Tower 
Street  to  Lombard  Street,  and  finally,  in  1774,  to  the 
Royal  Exchange  of  London,  and  there  developed  into 
the  chief  center  of  marine  insurance  in  the  United  King- 
dom, and,  for  that  matter,  in  the  world. 

From  this  account  it  is  not  to  be  inferred  that  marine 
insurance  in  the  United  Kingdom  is  confined  to  Lloyds 
or  to  British  shipping.  Prior  to  the  beginning  of  the 
eighteenth  century  the  business  was,  it  is  true,  confined 
almost  entirely  to  the  plan  of  Lloyds,  according  to  which 
individuals  assumed  risks  upon  the  strength  of  their  per- 
sonal honesty  and  financial  standing  in  the  community. 
Indeed,  it  was  the  practice  of  various  individuals  sub- 
scribing their  names  to  the  insurance  contract  for  a  certain 


300  YALE  READINGS  IN  INSURANCE 

portion  of  the  total  risk  that  gave  rise  to  the  familiar  term 
"underwriter."  But  gradually  companies  began  to  par- 
ticipate in  the  same  business  that  Lloyds  was  pursuing. 
The  movement  seemed  to  gain  strength  rapidly,  when, 
in  1720,  the  British  government  in  return  for  a  payment 
of  £300,000  to  the  Exchequer  limited  the  privilege  of 
insuring  marine  risks  to  only  two  companies  besides  Lloyds, 
namely,  the  London  Assurance  Corporation  and  the  Royal 
Exchange  Assurance  Corporation.  Shortly  after,  however, 
this  monopoly  was  removed  and  since  then,  especially 
during  the  nineteenth  century,  numerous  corporations  in 
London,  Liverpool,  and  Glasgow,  with  vast  accumulated 
assets  and  far-reaching  importance,  have  risen  alongside 
the  unique  and  unrivaled  corporation  of  Lloyds,  and,  like 
that  institution,  have  extended  their  influence  to  all 
corners  of  the  earth.  So  effective,  in  fact,  has  the  compe- 
tition of  the  powerful  insurance  companies  become  that 
Lloyds,  although  yet  the  center  of  attraction  in  the  marine 
business,  has  largely  ceased  to  possess  the  dominating 
influence  of  former  days.  It  is  estimated  that  Great 
Britain  to-day  transacts  about  six-eighths  of  the  sea  insur- 
ance of  the  world,  a  proportion  so  large  that  one  can  look 
for  an  explanation  only  to  the  preponderating  importance 
of  Great  Britain  as  a  shipping  nation. 

The  supreme  importance  of  Lloyds  in  marine  insurance 
from  an  international  standpoint  justifies  a  brief  explana- 
tion of  its  organization  and  purposes.  Until  quite  recently, 
Lloyds  was  an  unincorporated  body  where  underwriters 
assembled  and  transacted  business  at  will,  subject  to  few 
or  no  regulations.  In  the  year  1871,  however,  Lloyds 
became  an  incorporated  organization,  and,  according  to 
the  act  of  incorporation,  now  exists  for  the  three-fold  pur- 
pose of  conducting  an  insurance  business,  of  protecting 
the  commercial  and  maritime  interests  of  its  members, 
and  of  collecting  and  disseminating  information  pertaining 
to  shipping. 

To  obtain  a  clear  view  of  how  this  three-fold  purpose  is 


HISTORY  OF  MARINE  INSURANCE  301 

realized,  it  is  essential  to  study  the  institution  of  Lloyds 
from  two  points  of  view,  namely,  the  intelligence  depart- 
ment and  the  corporation  of  underwriters.  For  the  sake 
of  convenience  we  may  consider  the  intelligence  depart- 
ment first,  since  the  collection  and  diffusion  of  maritime 
information  is  a  prime  prerequisite  to  successful  under- 
writing. Briefly  described,  this  department  consists  of 
numerous  agents  situated  in  every  part  of  the  world,  whose 
position  is  considered  one  of  the  highest  honor  and  impor- 
tance, and  whose  duty  it  is  to  forward  promptly  informa- 
tion to  headquarters  concerning  the  arrival  and  departure 
of  vessels,  the  occurrence  of  wrecks  and  accidents,  or  any 
other  events  which  vitally  affect  shipping.  As  represen- 
tatives of  Lloyds,  these  agents  are  also  required  to  render 
aid  to  masters  of  vessels  in  distress,  to  take  charge  of  a 
wrecked  vessel's  stores  and  materials  in  order  to  avoid 
unnecessary  loss,  to  adopt  precautionary  measures  against 
dishonesty  when  it  becomes  necessary  to  repair  ships,  and 
in  a  general  way  to  protect  the  interests  of  the  under- 
writers. To  supplement  the  efforts  of  these  agents,  Lloyds 
also  desires  the  masters  of  vessels  to  report  to  the  nearest 
Lloyds'  agent  any  information  of  interest  concerning  other 
ships  which  they  might  have  seen  or  spoken  with  while 
on  their  voyage. 

All  the  information  thus  obtained  by  Lloyds  from  agents 
and  shipmasters  from  all  parts  of  the  globe  is  next  analyzed 
and  distributed  for  the  benefit  of  underwriters  and  sub- 
scribers. This  brings  us  to  the  next  important  feature  of 
Lloyds,  namely,  its  publications.  These  are  five  in  number, 
namely : 

(1)  Lloyds'  List.  The  official  daily  publication  of  the 
corporation  containing  all  shipping  news  as  currently  re- 
ceived, and  generally  recognized  as  the  most  reliable  among 
the  various  sources  of  maritime  intelligence. 

(2)  Lloyds'  Register  of  British  and  Foreign  SJiipping. 
An  annual  publication  founded  in  1834,  and  designed  to 
indicate  the  general  character  of  all  vessels  in  the  British 


302  YALE  READINGS  IN  INSURANCE 

marine  of  not  less  than  one  hundred  tons,  besides  numerous 
vessels  in  foreign  fleets.  Among  other  items,  this  publica- 
tion states  the  name,  materials  of  construction  and  state 
of  repairs  of  the  ship,  its  dimensions,  registered  tonnage, 
and  general  equipment,  the  date  and  place  of  construction 
and  by  whom  constructed,  the  name  of  the  owners,  the 
port  to  which  the  vessel  belongs,  and  the  date  of  the  last 
sm-vey,  and,  finally,  the  name  of  the  master  and  the  date 
of  his  appomtment.  To  keep  the  shipping  world  informed 
of  any  variations  which  may  occur,  supplementary  lists 
are  published  monthly  in  connection  with  the  annual 
edition  of  the  Register.  In  other  words,  this  annual  regis- 
ter may  be  likened  to  a  catalogue  of  nearly  all  the  important 
vessels  of  the  world,  from  which  the  underwriter  may 
ascertain  by  a  hurried  reference  the  general  fitness  of  a 
specified  vessel  to  make  a  given  voyage  or  carry  a  certain 
cargo.  To  render  such  reference  on  the  part  of  the  under- 
writer still  easier,  both  iron  and  wooden  vessels  are  each 
divided  into  separate  classes,  and  these  classes  into  grades, 
each  grade  being  designated  by  a  conventional  symbol.^ 
Lloyds'  Register  is  thus  the  handbook  of  the  underwriter: 
but  it  should  always  be  kept  in  mind  that  while  it  is  of 
the  greatest  service  to  those  who  accept  marine  risks,  it 

1  Since  the  classification  of  vessels  is  fiindamental  in  the  shipping 
and  insurance  business,  the  importance  of  a  publication  like  Lloyds' 
Register  can  not  well  be  overestimated.  Its  influence  became  so  potent 
a  factor  in  British  shipping  that  other  nations  were  obliged  to  adopt 
a  similar  system,  until  to-day  Lloyds'  Register  constitutes  the  standard 
after  which  all  other  maritime  nations  have  modeled  their  own  regis- 
ters. To  such  an  extent  has  classification  of  vessels  become  a  neces- 
sary adjunct  to  the  shipping  industry,  that  practically  no  vessel  of 
any  importance  in  any  nation  is  without  a  regular  classification  in  some 
standard  register.  Chief  among  the  registers  now  published  in  addi- 
tion to  Lloyds  are  the  Register  of  American  Shipping  and  the  Amer- 
ican Lloyd  of  the  United  States,  the  Bureau  Veritas  of  France,  the 
Germanische  Lloyd  and  the  Stettiner  Register  of  Germany,  the  Austro- 
Ungarian  Veritas  of  Austria,  the  N ederlandische-W erienigung  of  Hol- 
land, the  Norske  Veritas  of  Scandinavia,  and  the  Veritas  Hellinque  of 
Greece. 


HISTORY  OF  MARINE  INSURANCE  303 

is  controlled  by  authorities  of  its  own,  and  is  an  institu- 
tion entirely  distinct  in  its  organization  from  the  corpora- 
tion of  underwriters.^ 

(3)  The  Index.  A  list  of  all  British  mercantile  vessels, 
together  with  numerous  foreign  ships,  showing  their  con- 
dition and  location  according  to  the  latest  reports.  This 
publication  is  not  only  open  to  inspection  at  Lloyds,  but 
members  and  subscribers,  wherever  situated,  may  upon 
request  obtain  the  latest  news  concerning  any  particular 
vessel, 

(4)  A  Register  of  Captains.  A  biographical  dictionary 
containing  a  record  of  the  service,  proficiency,  and  char- 
acter of  the  twenty-five  thousand  or  more  certified  com- 
manders of  the  British  marine,  and 

(5)  A  Record  of  Losses,  frequently  called  the  Black 
Book. 

Turning  now  to  the  corporation  of  underwriters,  as 
distinct  from  the  intelligence  department,  it  is  of  interest 
to  note  that  its  membership  consists  of  two  classes:  (1) 
the  underwriting  members  who  write  insurance  for  their 
own  profit,  subject,  of  course,  to  the  rules  and  require- 

1  In  the  modem  system  of  classification,  as  Professor  Gambaro 
explains,  "Ships  are  divided  into  three  classes,  according  to  the 
degree  of  confidence  to  be  placed  in  their  seaworthiness.  A  vessel 
recently  and  strongly  built,  well  rigged  and  equipped,  is  assigned  for 
a  number  of  years  to  the  first  class,  and  may,  therefore,  during  such 
period  be  employed  with  full  confidence  in  any  voyage,  for  the  con- 
veyance of  any  kind  of  merchandise;  provided,  of  course,  that  she 
suffer  no  deterioration  or  damage  as  may  render  her  unserviceable, 
and  be  maintained  in  good  state  of  repair,  which  is  ascertained  by 
periodical  surveys.  A  second  term  of  the  same  class  is  often  granted  to 
ships  proving  still  strong,  and  in  a  good  state  of  preservation  after  the 
first  period.  A  special  distinction  over  and  above  the  highest  classi- 
fication may  be  obtained  for  a  ship,  provided,  such  materials  be  used  in 
her  build  as  directed  by  the  committee.  Vessels  which  have  gone 
through  this  first  class  term  are  assigned  to  the  second,  and  lastly,  to 
the  third  class;  the  latter  embracing  vessels  in  very  poor  condition, 
considered  fit  only  for  short  and  easy  voyages,  and  to  carry  cargoes 
not  to  be  damaged  by  sea-water,  such  as  timber,  salt,  etc."  — Gam- 
baro's  "Lessons  in  Conunerce,"  p.  137. 


304  YALE  READINGS  IN  INSURANCE 

merits  imposed  by  the  managing  committee  of  Lloyds, 
and  (2)  the  non-miderwriting  members,  who,  as  brokers 
and  merchants,  transact  business  through  the  under- 
writing members  either  for  themselves  or  others.  In 
addition  to  these  two  classes,  there  are  also  numerous 
subscribers  to  Lloyds  for  the  information  received  at  the 
Royal  Exchange,  many  of  whom  are  British  and  foreign 
insurance  companies.  Here  it  remains  to  be  said  that 
practically  all  the  great  marine  insurance  companies  of 
the  United  Kingdom  (and  they  number  some  thirty  or 
more),  even  though  their  marine  business  in  the  aggregate 
far  exceeds  that  of  Lloyds,  must  nevertheless  be  repre- 
sented on  its  floor,  and  must  necessarily  and  continually 
receive  the  assistance  of  that  organization  in  the  prose- 
cution of  their  business.* 

As  a  corporation  Lloyds  resembles  our  stock  exchanges 
in  many  particulars.  It  assumes  no  responsibility  what- 
ever for  the  solvency  of  its  members.  It  seeks  only  to 
provide  proper  facilities  to  its  members  for  the  conduct  of 
their  business,  and  to  limit  admission  to  men  of  recog- 
nized honesty  and  financial  standing.  As  a  guarantee 
for  the  fulfilment  of  contracts,  each  underwriting  member 
is  required  to  deposit  with  the  committee  of  Lloyds  securi- 
ties to  the  value  of  £5000.  Aside  from  this  requirement, 
the  corporation  does  not  concern  itself  as  to  the  nature 
or  the  volume  of  the  business  transacted  by  its  members. 
They  are  free  to  do  as  much  underwriting  as  they  like, 
and  may  pursue  any  kind  of  insurance  they  choose,  only 
they  must  do  it  honestly.  As  a  consequence  Lloyds, 
although  marine  insurance  and  the  furnishing  of  maritime 
intelligence  is  the  fundamental  character  of  its  business, 
is  a  place  where  one  may  insure  against  all  sorts  of  con- 
tingencies —  against  fire,  epidemics,  sickness  and  all  sorts 
of  accidents,  against  the  risks  of  journeys  and  business 

'  For  a  concise  account  of  the  organization  of  Lloyds  and  an  excel- 
lent description  of  its  system  of  classifying  vessels  and  distributing 
marine  intelligence,  see  Professor  Gambaro's  "  Lessons  in  Commerce." 


HISTORY  OF  MARINE  INSURANCE  305 

ventures,  against  the  loss  of  works  of  art  and  valuable 
possessions,  or  to  avoid  loss  from  the  unforeseen  stoppage 
of  games  and  races,  or  to  meet  contemplated  changes  in 
foreign  tariffs,  or  to  provide  against  the  risks  of  war  during 
periods  of  political  excitement,  and  a  himdred  and  one 
other  contingencies  of  every  conceivable  kind,  many  of 
them  nothing  more  than  betting  arrangements.  Com- 
bining all  these  different  forms  of  indemnity  with  the 
marine  business,  authorities  place  the  total  amount  of 
risk  carried  at  Lloyds  at  approximately  $2,500,000,000, 
while  the  total  deposits  paid  in  by  members  as  a  guarantee 
for  the  performance  of  contracts  are  placed  at  not  more 
than  $20,000,000,  or  about  only  1  per  cent,  of  the  risks 
assumed. 

In  its  daily  routine  of  business  Lloyds  affords  an  inter- 
esting and  instructive  spectacle,  and  illustrates  the  com- 
plexity and  arbitrary  nature  which  surrounds  a  good  share 
of  the  business.  On  the  Exchange,  for  example,  arc 
several  hundred  underwriters,  unincorporated  and  unable 
thus  to  act  jointly.  To  describe  the  manner  in  wdiich 
these  members  transact  business,  I  can  do  no  better  than 
cite  from  Mr.  Samuel  Plimsoll's  concise  and  picturesque 
account.  "There  are  seldom,"  he  says,  "less  than  fifty 
underwriters  on  a  policy,  frequently  over  one  hundred 
(the  three  policies  before  me  show  an  average  of  seventy- 
two  subscribers),  not  bound  together  at  all,  each  indi- 
vidual can  only  act  for  himself,  and  accepts  just  so  much 
of  the  whole  risk  as  he  pleases;  he  seldom,  almost  never, 
accepts  for  any  large  amount,  always  for  a  very  small 
proportion  indeed  of  the  whole  amount  covered.  The 
way  of  it  is  this:  a  member  of  Lloyds  (undc^rwriters'  room) 
first  gives  evidence  or  security  as  to  his  ability  to  pay 
losses;  then  he.  has  a  desk  allotted  to  him  (they  are  very 
numerous  —  between  three  hundred  and  fifty  and  four 
hundred  in  London  alone,  where,  however,  the  bulk  of 
underwriting  is  done);  the  proposals  of  insurance  are 
handed  around  by  the  insurance  brokers'  clerks  all  day 


306  Y.\LE  READINGS  IN  INSUR.^NCE 

long;  these  proposals,  called  slips,  give  the  name  of  the 
ship,  amount  to  be  insured,  and  rate  per  cent,  offered. 
Perhaps  sixty  or  seventy  of  these  slips,  or  even  more,  are 
laid  before  each  underwriter  daily.  After  reference  to 
liloyds'  List  of  Ships,  he  either  passes  it  on  or,  if  he  de- 
cides to  '  take  a  line '  upon  it,  he  subscribes  or  '  underwrites ' 
his  name,  together  with  the  amount  he  is  willing  to  guar- 
antee for  at  the  rate  specified;  this  varies  much  and  gen- 
erally goes  as  low  as  £200  or  £100,  frequently  £50,  and 
sometimes  even  less  than  that  —  never  an  amount  large 
enough  to  warrant  his  disputing  his  liability  in  case  of 
loss.i  " 

As  a  result  of  the  procedure  thus  described  by  Mr. 
Plimsoll,  it  follows  that  the  underwriter  at  Lloyds  has 
practically  no  opportmiity  to  examine  the  risk  as  he  would 
do  in  other  leading  forms  of  insurance.  The  only  sources 
of  information  which  he  might  use  as  a  guide  are,  as  a 
rule,  the  publications  of  the  corporation,  like  the  Annual 
Register,  the  Captain's  Register,  and  Lloyds'  List.  From 
these  he  may  obtain  useful  information  concerning  the  age, 
size,  structui'e,  equipment  and  management  of  the  vessel 
as  based  on  frequent  surveys  by  expert  surveyors.  But 
naturally  such  classifications  have  their  limits,  and  do 
not  purpose  giving  more  than  a  general  description  of 
the  vessel  in  question.  Concerning  many  factors  like 
stowage,  the  amount  of  load,  the  size  and  efficiency  of 
the  crew,  and  numerous  other  factors  equally  vital  to  the 
safety  of  a  vessel  and  cargo  at  sea,  these  publications  can 
offer  no  assistance.  It  is  here  that  the  insurer  must  use 
his  judgment,  and  where  success  is  largely  dependent  upon 
the  specialized  ability  of  the  underwriter.  Nor  would 
it  be  to  the  interest  of  the  insurer  at  Lloyds  to  make  such 
an  examination,  assuming  that  he  could  do  so.  Not  only 
will  his  limited  time  and  the  large  number  of  proposals 
made  to  him  daily  render  this  impossible,  but  the  mere 
fact  that  probably  half  a  hundred   other  persons  have 

'  Samuel  Plimsoll.     The  Nineteenth  Century,  Vol.  XXV,  p.  329. 


HISTORY  OF  MARINE  INSURANCE  307 

underwritten  the  same  policy  will  make  it  seem  foolhardy 
that  he  alone  should  undertake  the  examination.  To 
retain  his  business  he  must  be  quick  in  accepting  or  re- 
jecting proposals  on  the  spot,  and  can  not  afford  to  tarry, 
since  it  is  the  brokers'  business  to  secure  insurance  for 
his  patrons  as  quickly  as  possible.  Moreover,  the  amount 
of  the  total  risk,  to  which  he  has  subscribed  is,  as  we  have 
seen,  comparatively  small  and  limited  to  an  amount  which 
will  not  make  it  worth  his  while  to  contest  a  claim  or  pur- 
sue an  examination.  And  even  if  the  underwriter  be  a 
subscriber  for  a  large  amount  it  does  not  necessarily  follow 
that  he  will  be  actually  liable  for  the  amount  underwritten, 
for  as  soon  as  he  fears  having  sustained  a  loss  he  will  en- 
deavor to  transfer  his  risk.  This  he  does  by  offering  a 
higher  premium  as  an  inducement  for  some  one  else  to 
take  all  or  a  share  of  his  risk.  One  underwriter  fearing  a 
loss  thus  transfers  part  of  his  risk  to  another,  who  expects 
the  early  and  safe  arrival  of  the  vessel.  If  uncertainty 
concerning  the  vessel  continues,  this  second  underwriter 
by  offering  a  still  higher  premium  may  transfer  part  of 
his  risk  to  another,  who  again  has  good  hopes,  and  so  on 
until,  if  it  is  finally  learned  that  the  vessel  and  cargo  are 
lost,  the  risk  has  been  so  widely  diffused  that  the  loss 
incurred  by  any  one  individual  is  comparatively  small. 
Lastly,  it  is  interesting  to  note  that  collectively  the  under- 
writers at  Lloyds  have  no  interest  in  examining  risks 
because  they  have  no  interest  in  diminishing  loss.  On 
the  contrary,  strange  as  it  may  seem,  they  express  a  pref- 
erence for  a  high  rate  of  loss  to  a  low  one.  Individually 
they  all  desire  and  expect  to  avoid  the  payment  of  claims, 
but  collectively  they  all  wish  and  expect  to  profit  by  high 
rates.  Hence  it  is  that  they  prefer  the  increase  in  pre- 
miums which  accompanies  an  increase  in  losses. 

A  review  of  marine  insurance  in  the  LTnited  States  shows 
that  its  development  as  well  as  its  present  status  is  radi- 
cally different  from  that  in  England  as  just  described.  In 
the  first  place,  the  business  has  been  conducted  almost 


308  YALE  READINGS  IN  INSURANCE 

altogether  by  corporations,  the  Lloyds  system  of  under- 
writing, though  often  tried,  having  never  obtained  a  pro- 
minent foothold  in  this  country.  Secondly,  while  British 
companies  have  had  a  long  and  prosperous  career,  the  com- 
panies of  the  United  States,  with  few  exceptions,  have 
either  failed  or  changed  the  character  of  their  business. 
If  we  are  justified  in  fixing  definite  limits,  the  develop- 
ment of  the  business  in  this  country  seems  to  divide  itself 
into  four  main  epochs,  each  with  distinctive  character- 
istics of  its  own.  The  dates  of  these  periods  may  be 
roughly  placed  at  1793  as  marking  the  end  of  the  first 
period,  1793  to  1840  as  indicating  the  limits  of  the  second 
period,  1840  to  1860  the  third,  and  1860  to  the  present 
time  the  final  period. 

During  the  fii"st  period,  extending  to  the  end  of  the 
eighteenth  century,  the  only  form  of  insurance  upon  goods 
or  vessels  of  which  we  have  definite  knowledge  was  by 
personal  underwriters.  Resort  was  had  at  first  to  the 
private  underwriters  of  Great  Britain,  frequent  mention 
being  found  in  early  colonial  correspondence  concerning 
London  indemnity  for  American  shipping.  Even  as  late 
as  1721  there  was  as  yet  no  insurance  office  in  Philadelphia, 
dependence  being  placed  mostly  upon  foreign  under- 
writers. In  that  year  we  find  a  Mr.  John  Copson  adver- 
tising in  the  American  Weekly  Mercury  of  May  25,  the 
opening  by  him  of  an  office  of  public  insurance  on  vessels, 
goods,  and  merchandise,  because,  as  he  announced  in  the 
advertisement,  "the  merchants  of  this  city  of  Philadelphia 
and  other  ports  have  been  obliged  to  send  to  London  for 
such  insurance,  which  has  not  only  been  tedious  and 
troublesome,  but  ever  precarious,  and  for  the  remedying 
of  which  this  office  is  opened."  Fom'  years  later  Mr. 
Francis  Rawle,  of  Philadelphia,  advised  the  establishment 
of  a  marine  insurance  office  under  colonial  legislative 
sanction,  and  the  pamphlet  embodying  his  ideas  was, 
according  to  report,  the  first  work  issued  from  Benjamin 
Franklin's  press.     Following  Mr.  Copson's  and  Mr.  Rawle's 


HISTORY  OF  M.AJIINE  INSURANCE  309 

pioneer  attempts  to  establish  insurance  offices,  few  efforts 
were  made  to  follow  in  their  footsteps.  Mr.  Fowler,  in 
his  history  of  insurance  in  Philadelphia,  informs  us  that 
for  seventy  years  afterwards  Philadelphia  merchants  still 
looked  to  the  Old  World  as  the  chief  source  from  which 
to  obtain  their  insurance.  Likewise  in  New  York  City  it 
was  not  until  1759  that  the  first  marine  insurance  office 
was  opened,  and  not  until  1778  that  the  New  Insurance 
Office  was  established.  The  underwriting  in  all  these 
cases  continued  to  be  by  individuals  or  partnerships  only, 
who  generally  represented  wealthy  citizens  of  the  com- 
munity. 

It  was  not  until  near  the  close  of  the  eighteenth  century 
that  a  number  of  citizens  of  Philadelphia  succeeded  in  in- 
ducing the  General  Assembly  of  Pennsylvania  to  charter 
a  marine  insurance  company,  capitalized  at  $600,000, 
The  reasons  assigned  for  this  step  by  the  legislative  com- 
mittee reporting  in  favor  of  granting  the  charter  were: 
(1)  That  an  incorporated  company  of  this  size  could  con- 
duct an  insurance  business  on  a  safer  and  more  staple 
basis  than  could  individuals;  (2)  that  from  a  legal  point 
of  view  justice  could  be  secured  more  readily  in  the  case 
of  a  corporate  organization,  since  it  would  obviate  the 
expense  and  loss  of  time  required  to  sue  separately  all 
the  different  underwriters  to  a  policy;  (3)  that  the  num- 
ber of  persons  underwriting  in  Philadelphia  was  insufficient 
for  the  needs  of  its  commercial  interests,  thus  occa- 
sioning a  drain  of  money  for  insurance  to  Europe  and 
neighboring  states;  and,  lastly,  that  since  the  company 
did  not  ask  for  a  monopoly,  the  granting  of  the  charter 
would  simply  mean  the  bringing  about  of  a  wholesome 
competition,  and  would  enable  the  business  to  be  contlucted 
on  an  enlarged  scale  to  the  great  benefit  of  commerce. 
In  view  of  these  reasons  thus  offered,  the  Assembly,  in 
the  year  1794,*  chartered  the  Insurance  Company  of  North 

>  The  Insurance  Company  of  North  America  began  business  as  an 
association  in  1792,  and  was  incorporated  in  1794. 


310  YALE  READINGS   IN   INSURANCE 

America,  the  first  stock  company  of  its  kind  upon  the  con- 
tinent whose  name  it  bore.  Fortunately  this  pioneer 
company  was  launched  at  a  time  when  Philadelphia  was 
still  the  commercial  metropolis  of  the  country,  with  its 
ship-owners  and  merchants  trading  in  all  the  remote  quar- 
ters of  the  globe,  and,  therefore,  large  purchasers  of  insur- 
ance. Indeed  it  was  not  long  before  the  brokers,  who 
previously  had  had  the  American  business  to  themselves, 
found  that  their  patrons  preferred  the  stability  of  cor- 
porate underwriting  on  a  large  scale  to  the  underwriting 
of  individuals.  In  the  very  first  year  of  active  business 
the  company  refused  to  write  for  private  offices,  and 
"reahzing  its  strength,  made  public  advertisement  of 
their  rules,  and  invited  orders  to  be  addressed  directly 
to  the  company."  ' 

This  important  step  toward  the  establishment  of  cor- 
porate underwriting  with  all  its  advantages  was  soon  to 
serve  as  a  model  for  similar  undertakings  in  other  parts 
of  the  country,  and  before  another  decade  had  passed  the 
Insurance  Company  of  North  America  was  to  have  active 
associates  in  its  own  home  as  well  as  in  New  York,  Boston, 
Baltimore,  Charleston,  and  other  places.  In  1796  was 
established  the  Insurance  Company  of  New  York  in  New 
York  City,  followed  by  the  Associated  Underwriters  of 
the  same  city  in  1797,  the  United  in  1797,  Columbian  in 
1801,  Washington  Mutual  in  1802,  Marine  in  1802,  Com- 
mercial in  1804,  Phoenix  in  1807,  Fireman's  in  1810, 
Ocean  in  1810,  and  others.  In  Philadelphia  there  followed 
the  Insm*ance  Company  of  the  State  of  Pennsylvania 
in  1794,  the  Phoenix  in  1803,  the  Philadelphia  in  1804, 
Delaware  in  1804,  Marine  in  1809,  and  the  United  States 
in  1810.  Boston  also  came  into  the  field  at  an  early  date, 
the  Massachusetts  Fire  and  Marine  Company  being  organ- 
ized in  that  city  in  1795,  and  the  Boston  Marine  in  1799; 
while  among  other  early  companies  of  importance  may  be 
mentioned  the  Charitable  Marine  Society  of  Baltimore, 

»  "BUstory  of  the  Insurance  Company  of  North  America,"  p.  56. 


HISTORY  OF  MARINE   INSURANCE  311 

organized  in  1796:  the  New  Haven  Insurance  Company,  of 
New  Haven,  in  1797;  the  Charleston  Insurance  Company, 
of  Charleston,  S.  C,  in  1797,  and  the  Newburyport  Marine, 
of  Newburyport,  Mass.,  in  1797.  So  rapid,  in  fact,  was  the 
movement  of  incorporating  insurance  companies  that  prior 
to  1800  thirty-two  insurance  companies  had  been  estab- 
lished in  this  country,  of  which  ten  were  doing  a  marine 
business.  By  1811  there  existed  in  Philadelphia  alone 
eleven  companies,  seven  of  which  were  marine  companies 
and  one  a  fire-marine  company,  while  by  1825  there 
were  twelve  marine  stock  companies  in  New  York,  and  at 
least  a  dozen  in  Boston. 

Prior  to  1830  the  history  of  these  companies  may  be 
characterized  as  one  of  periodical  prosperity  and  depression. 
If  judged  by  the  experience  of  the  largest  company  (and 
this  is  typical  of  most  other  companies)  the  business  ex- 
hibited the  greatest  fluctuations.  Thus  during  the  first 
decade  of  its  history  ending  with  December,  1802,  the 
Insurance  Company  of  North  America  collected  premiums 
of  $6,037,456  and  paid  losses  of  $5,500,887,  leaving  a  margin 
of  less  than  9  per  cent,  for  expenses.  During  this  decade 
the  premium  receipts  rose  from  $213,465  in  1793  to  $290,656 
in  1791  and  $1,304,208  in  1798.  This  large  income,  re- 
ceived by  an  American  company  prior  to  the  beginnijig 
of  the  nineteenth  century,  it  is  interesting  to  note,  is  equal 
to  three-fourths  of  the  mai'ine  prcnniums  received  by  the 
same  company  to-day,  and  exceeds  the  marine  premium 
income  of  any  other  Am(>rican  company  at  the  present 
time  except  one.  Then  began  a  decline,  until  in  1802 
the  premium  income  amounted  to  only  $103,902  which 
sum,  however,  was  trebknl  in  1805,  and  again  trebled  in 
1806.  Then  came  the  Eml)argo  Acts,  and  premium  re- 
ceipts suddenly  fell  to  the  mere  pittance  of  $5,483  in  1808, 
while  losses  continued  as  high  as  $108,568.  Even  in  the 
y(^ars  1809  to  1812,  inclusive,  the  average  annual  receipts 
equaled  but  $45,449,  as  compared  with  $1,304,000  in 
1798.     If  the  decade  ending  in  1802  is  companMl  with  tliat 


312  YALE  READINGS  IN  INSURANCE 

ending  in  1812,  it  a])pcars  that  the  first  shows  premium 
receipts  of  $6,000,000  and  losses  of  $5,500,000,  while  the 
second  shows  premiums  of  only  $1,364,637,  or  only  one- 
fifth  the  income  of  the  first  decade,  and  losses  of  .$1,583,836. 

These  remarkable  fluctuations,  as  also  the  decrease  in 
the  annual  premium  receipts  and  the  increase  in  the  ratio 
of  loss  to  income,  are  to  be  explained  partly  by  the  growing 
competition  arising  from  the  numerous  rival  institutions 
which  were  springing  up  everywhere;  partly  because  in- 
surance managers  had  not  yet  mastered  the  lesson  of  a 
solid  sm'plus  and  very  imprudently  distributed  all  profits 
to  stockholders  without  making  provision  for  the  heavy- 
losses  of  the  immediate  and  stormy  future;  but  mainly 
to  the  heavy  losses  connected  with  the  Napoleonic  Wars. 
This  series  of  bitter  struggles,  with  its  blockades  and 
counter-blockades,  affecting  practically  all  of  commercial 
Europe,  subjected  American  commerce  to  unusual  risks 
and  losses.  Insurance  was  consequently  in  great  demand 
and  came  for  the  first  time  to  be  regularly  adopted  by 
all  ship-owners,  and  at  rates  which  averaged  as  high  as 
twelve  per  cent.  But  while  the  business  of  marine  insur- 
ance received  a  strong  impetus  during  this  period  of  strife, 
the  business  was,  nevertheless,  of  uncertain  tenure,  being 
constantly  subject  to  the  heavy  losses  arising  from  capture, 
detention,  and  litigation  which  frequently  resulted,  owing 
to  the  absence  of  a  large  surplus,  in  severely  impairing 
the  capital  of  the  companies.  Mr.  Seyfert,  for  example, 
in  a  list  compiled  from  a  report  of  the  Secretary  of  State, 
shows  that  the  total  captures  of  American  vessels  by  the 
British,  French,  Neapolitans  and  Danes  during  the  years 
1803  to  1812  aggregated  nearly  1600  vessels,  the  major 
portion  of  which  were  condemned,  and  most  of  the  others 
detained.  At  the  same  time  we  have  the  statement  made  in 
the  House  of  Peers  that  600  American  vessels  were  seized 
or  detained  in  British  ports  within  a  period  of  less  than 
five  months  from  November  6,  1793,  to  March  28,  1794.» 

»  Adam  Seyfert.     "Statistical  Annals  of  the  United  States,"  pp.  79-81. 


HISTORY  OF  MARINE  INSURANCE  313 

Such  extraordinary  losses  by  capture  and  detention 
were  bound  to  prove  a  heavy  drain  on  the  resources  of 
the  companies.  And  in  those  days  of  slow  communica- 
tion it  would  often  happen  that  they  might  be  incurring 
heavy  losses  at  the  hands  of  foreign  cruisers  without  being 
able  to  obtain  knowledge  of  the  same  for  months,  in  the 
meantime  assuming  new  risks  equally  exposed  to  the 
attacks  of  the  enemy.  To  obtain  a  clear  conception  of 
the  losses  thus  sustained  one  need  only  examine  the  pro- 
ceedings of  a  few  companies  of  this  period.  On  February 
12,  1801,  the  directors  of  the  Insurance  Company  of  North 
America  "ordered  that  an  account  of  all  illegal  captures 
made  by  the  British  and  French  be  made  out  for  the  pur- 
pose of  representing  the  same  to  the  United  States 
Government." '  No  better  evidence  can  be  advanced  to  indi- 
cate the  severity  of  the  struggle  which  the  early  companies 
were  undergoing  than  the  account  of  the  committee  en- 
trusted with  this  work.  Its  report  stated  that  ''the  number 
and  amount  of  the  companies'  claims  on  the  British  Gov- 
ernment for  spoliation  on  property  which  they  (the  com- 
mittee) think  that  nation  ought  to  refund  is  about  $981,355; 
other  losses  occasioned  to  this  office  by  capture  of  the 
British,  and  for  which  there  is  no  expectation  of  reimburse- 
ment, is  about  $78,800.  With  respect  to  the  captures 
made  by  the  French,  your  committee  can  only  state  that 
they  amount  to  $1,952,730."^  Many  of  the  claims  thus 
incurred  were  later  adjusted  by  international  arrange- 
ment. Others,  however,  were  not,  and  numerous  attempts 
were  made  in  later  years  to  recover  losses  sustained  during 
this  period.  No  less  than  twenty-two  reports  of  commit- 
tees, all  favoring  the  claimants,  were  made  in  Congress 
between  the  years  1827  and  1846  for  an  indemnity  of 
$5,000,000.  Twice,  in  1846  and  1855,  did  the  bills  pass 
through  all  stages  of  enactment  except  the  President's 
signature,  and  even  as  late  as  1885  we  find  the  matter  still 
before  Congress, 

»  "History  of  the  Insurance  Company  of  North  America,"  p.  56. 
'Ibid. 


314  YALE  READINGS  IN   INSURANCE 

With  the  cessation  in  1815  of  the  widespread  Napole- 
onic Wars  of  twenty-three  years  and  the  introduction  of 
a  period  of  profound  peace  one  might  have  supposed  that 
the  business  would  have  immediately  revived.  But  such 
was  not  the  case.  The  high  war  rates  gradually  gave 
way  before  low  peace  rates,  and  by  1820  these  were  the 
general  rule.  By  this  time,  too,  personal  underwriters 
had  been  almost  entirely  displaced  by  underwriting  cor- 
porations whose  number  had  greatly  multiplied  in  all  the 
leading  seaports.  To  make  matters  still  worse,  in  view 
of  the  rapidly  declining  rates,  these  numerous  corporations 
began  to  wage  a  fierce  and  incessant  competitive  war 
against  each  other.  The  elimination  of  the  personal 
underwriter  meant  the  establishment  of  the  broker  as 
middleman,  and  soon  the  numerous  companies  in  the 
various  leading  commercial  centers  no  longer  confined 
their  business  activity  to  their  own  locality,  as  they  had 
done  heretofore,  but  began  to  solicit  risks  from  the  outside 
by  correspondence  and  otherwise.  As  a  result  of  this 
rate  war,  many  of  the  younger  companies  were  brought 
to  the  verge  of  insolvency,  and  most  of  the  older  ones  were 
unable  to  pay  dividends  on  their  capital  equal  to  the 
current  rate  of  interest.  So  great  was  the  competition 
that  at  the  close  of  1825  the  stock  of  only  four  of  the 
twelve  stock  companies  in  New  York  was  quoted  at  or 
above  par.  Beginning  with  1828  marine  insurance  com- 
panies were  also  obliged  to  pay  extraordinary  losses  occa- 
sioned by  fraudulent  wrecks  on  the  Atlantic,  Gulf,  and 
West  India  coasts.  Estimates  place  the  losses  incurred 
in  this  way  at  one-third  of  the  total  loss  sustained  by  com- 
panies during  the  twenty  years  preceding  1840.^  It  was 
not  till  1844  that  the  companies  of  Philadelphia,  for  ex- 
ample, managed  to  organize  a  protective  association 
through  whose  action  these  heavy  losses  by  fraud  could 
be  averted.^ 

>  Albert  BoUes.     "Industrial  History  of  the  United  States,"  p.  820. 

2  Mil. 


HISTORY  OF  MARINE  INSURANCE  315 

Beginning  witli  the  fifth  decade,  the  business  again 
showed  signs  of  gradual  revival,  and  the  twenty  years 
following  1840  may  be  justly  characterized  as  the  "golden 
period"  of  American  marine  insurance.  It  was  during 
these  years  that  the  American  clipper  ship  received  its 
highest  development,  and  became  probably  the  most 
efficient  carrier  in  the  world.  Our  tonnage  in  the  foreign 
carrying  trade  increased  from  762,838  registered  tons  m 
1840  to  2,496,894  tons  in  1861,  the  highest  point  ever 
reached  in  our  history,  and  a  tonnage  nearly  two  and  one- 
half  times  as  large  as  the  largest  tonnage  registered  for 
any  single  year  prior  to  1840.  Along  with  this  remarkable 
increase  of  1,734,056  tons  in  twenty  years,  American 
vessels  continued  during  these  two  decades  to  carry  on 
an  average  70  per  cent,  of  the  combined  imports  and 
exports  of  the  country,  the  proportion  in  some  years 
running  as  high  as  81  to  83  per  cent.  It  was  also  during 
this  epoch  that  American  trade  with  the  Far  East  and 
other  remote  parts  of  the  globe  became  more  prominent 
than  ever  before.  Unlike  the  practice  in  modern  com- 
merce, the  merchants  in  those  days  were  largely  the  owners 
of  the  ships  which  carried  their  cargoes,  and  naturally 
they  insured  both  in  American  companies.  The  voyages, 
as  a  rule,  were  long,  extending  in  many  cases  over  six 
or  nine  months  before  the  vessel  was  heard  from.  The 
risk  was  thus  very  considerable,  insurance  was  an  indis- 
pensable necessity  greatly  desired,  and  rates  ranged  as 
high  as  five  to  six  per  cent.  We  are  told  that  even  be- 
tween New  York  and  Liverpool  the  rate  on  dry  goods 
was  as  high  as  2  per  cent,  compared  with  the  existing 
rate  of  between  one-eighth  and  one-tenth  of  1  per  cent, 
on  our  modern  steamers.  All  these  factors  —  increasing 
commerce  under  American  ownership,  long  voyages  of 
a  risky  nature,  and  high  rates  —  combined  to  give  to 
marine  insurance  dui'ing  this  period  an  impetus  such  as 
it  had  never  experienced  before. 

But  this  period   of  unparalleled  growth  proved   to  be 


316  YALE  READINGS  IN   INSURANCE 

but  temporary,  and  was  followed  by  an  epoch,  extending 
to  the  present,  as  disastrous  to  the  business  as  the  pre- 
ceding period  had  been  beneficial.  For  many  years 
marine  insurance  had  kept  in  the  forefront  of  our  com- 
mercial life,  and  could  indeed  be  ranked  with  fire  insur- 
ance in  importance.  It  began  to  show  unmistakable 
signs  of  decay,  for  reasons  to  be  mentioned  shortly,  when 
the  American  flag  began  to  vanish  from  the  sea.  This 
decline  has  been  continuous  and  unchecked.  In  fact, 
during  the  last  thirty-five  years  marine  insurance  by 
native  companies  has  had  to  struggle  for  its  life.  How 
severe  this  struggle  has  been,  and  how  severely  the  busi- 
ness has  suffered  may  be  inferred  from  the  fact  that 
since  the  organization  of  the  first  company  in  New  York, 
in  1796,  some  thirty  companies  have  been  chartered  in 
that  state,  and  of  this  number  only  three,  the  Atlantic 
Mutual,  the  Home,  and  the  Greenwich  Insurance  Compa- 
nies, still  continue  to  do  business.  To  recite  the  his- 
tory of  the  business  in  our  other  commercial  states  is 
merely  to  repeat  its  history  in  New  York.  In  all  ma- 
rine insurance  once  flourished,  but  in  all  it  has  largely 
disappeared. 

But  why  this  decline?  it  will  be  asked.  The  answer 
is  that  two  main  causes  have  contributed,  namely,  com- 
petition of  foreign  companies,  and  changed  business  con- 
ditions. Owing  principally  to  the  introduction  by  England 
during  the  fifth  and  sixth  decades  of  the  last  century  of 
iron  as  ship-building  material  and  coal  as  fuel,  just  at 
the  time  when  the  United  States  had  not  yet  developed 
its  iron  and  coal  resources,  and  when  the  attention  of  the 
country  was  turned  away  from  the  sea  to  the  development 
of  the  interior,  the  American  wooden  ship,  which  up  to 
this  time  had  been  an  important  factor  in  international 
trade,  began  for  the  first  time  to  feel  seriously  the  effects 
of  foreign  competition.  Immediately  following  the  intro- 
duction of  the  iron  steamship  by  England  came  the  Civil 
War,  with  its  heavy  losses  for  marine  companies,  with 


HISTORY  OF  MARINE  INSURANCE  317 

its  heavy  taxation  of  American  commerce,  with  the  al- 
most complete  cessation  of  the  miportant  cotton  trade 
and  the  trade  with  the  Southern  States,  with  the  capture 
and  destruction  of  Union  ships  by  Confederate  cruisers, 
with  the  transfer  by  sale  of  a  large  portion  of  American 
tonnage  to  foreign  countries,  and,  in  general,  the  complete 
demoralization  of  American  shippmg.  The  direct  effect 
of  these  various  factors,  growing  out  of  the  Civil  War, 
upon  our  marine  insm-ance  companies  can  scarcely  be 
over  emphasized.  To  illustrate  how  the  prosperity  of  the 
business  in  the  preceding  period  vanished  shortly  after 
the  commencement  of  hostilities,  we  can  do  no  better 
than  consult  the  annual  reports  of  the  New  York  Insurance 
Department,  since  the  experience  of  the  companies  here 
is  but  typical  of  that  in  other  states.  In  the  report  of 
1862  the  superintendent  of  insurance  states  "that  the 
disorders  and  complications  resulting  from  the  insurrec- 
tion of  several  states  during  the  last  year  have  necessarily 
affected  to  a  considerable  extent  the  business  of  our  marine 
companies;  but  an  examination  of  their  statements  will 
show  that  the  well-established  reputation  of  our  marine 
underwriters  is  enhanced  by  their  successful  transit  over 
this  ever  memorable  year.  With  the  single  exception  of 
the  Anchor  no  failures  have  occured  among  the  companies." 
In  the  report  of  1863  we  again  find  that  "not  a  single 
company  is  blotted  out."  But  the  companies  could  not 
continue  to  fight  successfully  against  overwhelming  mis- 
fortunes. In  1864  we  note  that  two  important  companies 
failed;  and  in  1865  occurred  the  failure  of  the  Columbian, 
with  outstanding  unpaid  losses  of  $3,470,000.  According 
to  the  report  for  1865  the  incomes  of  the  marine  insurance 
compani(;s  in  New  York  showed  that  only  one  of  the  eleven 
companies  in  the  state  received  more  than  it  expended 
during  tlui  year,  the  total  net  excess  of  expenditures  over 
income  being  $1,458,309,  not  counthig  the  heavy  losses  of 
the  Columbian.  Wliile  the  ratio  of  marine  and  inland 
losses  paid  to  premiums  received  in  the  United  States  m 


318  YALE  READINGS  IN   INSURANCE 

1904  amounted  to  but  47.43  per  cent.,  that  ratio  rose  to 
71.64  per  cent,  in  1865  (not  including  the  losses  of  the 
Columbian),  and  to  the  extraordinary  ratio  of  83.13  per 
cent,  in  1866.  Although  the  premiums  in  1866  were  in- 
creased $3,223,199  over  the  year  1865,  the  losses  exceeded 
those  of  1865  by  $3,938,606;  while  the  gross  expenditures 
of  the  companies  exceeded  the  gross  income  in  the  sum  of 
$1,243,000,  thus  causing  the  superintendent  of  insurance 
to  report  that  "the  present  fearful  percentage  of  loss  is 
too  excessive  and  must  in  some  manner  be  reduced,  and 
not  merely  covered  by  insurance."  Before  business  con- 
ditions could  again  become  stable,  the  number  of  marine 
insurance  companies  in  New  York  had  been  reduced  by 
failures  from  fourteen  (the  number  in  1861)  to  nine  in 
1867,  while  nearly  all  which  survived  were  no  longer  the 
prosperous  companies  of  the  preceding  decade. 

But  there  were  also  indu-ect  effects  growing  out  of  the 
Civil  War  and  the  competition  of  the  iron  steamship  quite 
as  important  as  those  just  mentioned.  All  the  factors 
enumerated  above,  coming  in  close  succession  and  at  a 
most  critical  time,  gave  Great  Britain  the  opportunity, 
which  she  was  only  too  quick  to  seize,  to  monopolize  the 
construction  and  operation  of  the  world's  shipping.  As 
a  consequence,  the  tonnage  of  the  United  States  engaged 
in  foreign  trade  has  gradually  declined  to  888,628  tons 
in  1904,  or  only  one-third  of  what  it  was  in  1861.  Wliile 
the  United  States  carried  75  per  cent,  of  our  total  imports 
and  exports  in  its  own  ships  during  the  two  decades  from 
1840  to  1861,  that  proportion  has  steadily  declined  until 
it  is  less  than  8  per  cent,  to-day. 

Now,  hand  in  hand  with  the  steady  decay  of  our  mer- 
chant marine  after  the  war,  there  followed  a  correspond- 
ing decline  in  the  magnitude  and  prestige  of  the  marine 
insurance  business.  Great  Britain  was  capturing  the  carry- 
ing trade  of  the  world,  and  British  merchants  and  ship- 
owners were  just  as  naturally  giving  their  patronage  to 
their  own  underwriters,  as  American  merchants  and  ship- 


HISTORY  OF  MARINE  INSURANCE  319 

owners   had   insured   in  American   companies  while   our 
trade  was  still  in  its  glory. 

But  British  underwriters  were  doing  more  than  merely 
acquiring  business  which  formerly  had  gone  to  American 
companies.  They  were  consciously  pursuing  a  policy, 
whether  justly  or  unjustly  it  is  not  our  purpose  to  state, 
which  aimed  to  give  preference  to  their  own  flag  on  the 
sea  through  inspection  and  classification  at  Lloyds,  and 
through  these  channels  the  fixing  of  insurance  rates.  The 
essential  features  of  this  policy  may  be  enumerated  as 
follows: 

(1)  To  grade  vessels  not  so  much  with  reference  to  their 
design  and  sea-going  capacity,  as  according  to  their  in- 
trinsic quality  as  measured  largely  by  the  cost  of  construc- 
tion and  repairs.  This  meant  discounting  the  sea-going 
worth  of  the  American  clipper  ship. 

(2)  To  favor  British-built  vessels  and  British  ship- 
building materials  in  the  matter  of  inspection  and  classi- 
fication. One  writer  even  goes  so  far  as  to  state  that 
''nothing  'foreign'  has  ever  received  the  highest  rating 
from  Lloyds."  '  Especially  in  the  rating  of  timber  for  ship- 
building purposes  has  this  policy  manifested  itself  most 
clearly.  At  no  time  has  American  timber  been  graded 
the  same  in  years  as  timber  of  British  origin,  the  best 
white  oak  of  the  United  States  being  allowed  but  two- 
thirds  of  the  time  given  to  British  oak.  From  the  begin- 
ning, too,  Lloyds  has  observed  the  rule  not  to  grant  a 
full  class  to  any  vessel  unless  the  date  and  place  of  building 
is  announced,  and  the  construction  has  taken  place  under 
survey.  At  the  same  time,  even  before  iron  ship-building 
began  in  England,  Lloyds  never  appointed  surveyors  to 
inspect  the  construction  of  foreign  wooden  vessels. 

(3)  To  pr-otect  and  foster  metal  and  steam  tonnage  and 
to  make  the  British  iron  steamship,  the  construction  of 
which  was  for  many  years  practically  monopolized  by 
Great  Britain,  the  standard  in  international  trade.     Such 

'  William  W.  Bates,  "American  Navigation,"  p.  303. 


320  YALE  READINGS  IN  INSURANCE 

a  policy  was  bound  to  hasten  the  declme  of  American 
shipping.  Underclassing  the  American  wooden  ship  by 
Lloyds  meant  in  actual  practice  a  very  considerable  de- 
crease in  the  chances  for  speedy  and  profitable  employ- 
ment. In  1870,  Lloyds  refused  to  classify  and  register 
foreign  wooden  vessels  except  on  special  survey  and  for 
a  period  not  exceeding  one  year.  The  object  was  to 
encourage  the  chartering  of  British  vessels  in  preference 
to  wooden  ships,  and  the  effect  of  the  rule  was  to  obtain 
for  Great  Britain  a  large  part  of  our  carrying  trade. 

Evidence  seems  to  show  that  marine  underwriting  has 
not  declined  in  the  United  States  because  American  com- 
panies have  failed  to  meet  the  rates  of  foreign  under- 
writers. Instead,  the  decline  must  be  attributed  to  the 
decay  of  our  merchant  marine  engaged  in  foreign  trade, 
and  among  the  numerous  causes  mentioned  as  instru- 
mental in  bringing  about  this  result,  the  policy  of  Lloyds 
must  be  classed  as  one.  As  Mr,  Bates  says:  "It  was  rare 
indeed  that  a  British  policy  covered  an  American  hull. 
The  purpose  was  to  mark  the  American  ship  with  inferi- 
ority in  the  Register,  thereby  to  prevent  ready  employment 
and  full  rates  of  freight.  And  yet,  in  order  to  get  cargoes 
that  were  bound  to  be  covered  by  British  insurance,  it 
was  necessary  to  hold  a  class  of  some  grade  in  Lloyds' 
Register.''^  Wliatever  the  purpose  of  the  various  regula- 
tions adopted  by  Lloyds  may  have  been,  whether  based 
justly  on  the  relative  merits  of  vessels  or  not,  they  did, 
at  a  most  critical  period  in  the  history  of  our  merchant 
marine,  represent  American  ships  to  the  world  as  an 
inferior  type,,  did  contribute  toward  the  decline  of  the 
American  marine  by  decreasing  its  chances  of  profitable 
employment,  and  by  helping  thus  to  transfer  the  carry- 
ing trade  from  the  United  States  to  Great  Britain,  did 
contribute  to  the  growth  of  marine  insm-ance  abroad  and 
toward  its  decline  here. 

Foreign  underwriters,  however,  were  not  satisfied  with 

1  William  W.  Bates,  "American  Navigation,"  p.  305. 


HISTORY  OF  MARINE  INSURANCE  321 

getting  tlie  American  business  that  came  to  them  at  home, 
but  began  in  the  early  seventies  to  invade  American  terri- 
tory itself.  To  ascertain  the  rapidity  of  this  movement 
we  may  again  consult  the  insurance  reports  of  New  York, 
the  experience  here  being  typical  of  that  in  other  leading 
commercial  states.  In  the  report  of  1868  the  superin- 
tendent of  insurance  states  that  ''no  foreign  marine 
insurance  companies  have  ever  been  admitted  by  this 
department  to  transact  business  in  the  State  of  New  York"; 
while  the  report  for  1871  shows  only  one  foreign  company 
as  compared  with  nine  New  York  companies.  By  1872, 
however,  there  were  four  foreign  marine  companies  trans- 
acting business  m  New  York;  while  by  1874  the  number 
had  increased  to  seven.  This  increase  in  the  number  of 
foreign  companies  has  continued,  so  that  while  to-day 
there  are  only  three  New  York  companies  of  any  impor- 
tance transacting  marine  insurance  in  that  state,  there 
are  fifteen  foreign  companies. 

In  entering  American  territory  foreign  companies  were 
materially  assisted  by  the  lenient  laws  of  some  of  our 
states  requiring  of  foreign  companies,  as  a  prerequisite 
for  admission,  a  deposit  equal  only  to  the  minimum  capital 
demanded  of  domestic  companies.  They  began  their 
onslaught  by  cutting  rates,  and  the  American  companies, 
probably  too  few  in  number  by  this  time  or  otherwise 
unable  to  effect  an  efficient  combination  in  opposition, 
were  compelled  to  follow  suit.  Then  began  a  period  of 
the  most  active  competition  between  domestic  and  foreign 
companies,  the  result  of  which,  in  view  of  the  other  un- 
favorable attending  circumstances  already  mentioned, 
meant  the  gradual  forcing  of  American  companies  out  of 
existence. 

In  this  competition  the  foreign  competitors  had  the  ad- 
vantage of  the  much  better  organization  and  the  much 
greater  financial  strength  acquired  at  home  during  their 
much  longer  existence,  and  could,  therefore,  afford  to 
assume  much  larger  risks  based  on  their  home  capital. 


322  YALE  READINGS  IN   INSURANCE 

The  small  American  companies,  on  the  contrary,  though 
their  assets  might  be  considerably  in  excess  of  the  assets 
actually  held  by  foreign  companies  in  this  country,  were, 
nevertheless,  for  the  reason  mentioned  above,  limited  to 
a  much  smaller  aggregate  of  risks.  To  distinguish  be- 
tween the  efficiency  of  the  two  classes  of  companies  in 
this  respect  one  need  only  examine  the  data  concerning 
foreign  companies  as  given  in  the  Insurance  Year-Book. 
Of  twenty-seven  leading  British  marine  companies  men- 
tioned here  in  1902,  twenty,  or  three-fourths,  confine 
themselves  solely  to  the  writing  of  marine  risks,  while 
in  the  United  States  nearly  all  companies  transacting  a 
marine  insurance  business  place  their  greatest  reliance 
upon  the  fire  insurance  branch  of  their  business.  More- 
over, most  of  the  early  American  companies  have  ceased 
doing  business  and  only  a  few  (the  leading  ones)  have  had 
a  long  and  continuous  existence.  In  the  United  Kingdom, 
on  the  contrary,  of  the  twenty-seven  companies  referred 
to,  eight  were  organized  prior  to  1837,  three  considerably 
before  the  beginning  of  the  nineteenth  century,  and  all 
except  four  have  had  an  existence  of  at  least  a  quarter 
of  a  century,  and  most  of  them  much  longer.  During 
this  long  and,  on  the  whole,  prosperous  existence  these 
companies  have  accumulated  enormous  assets,  thus  giv- 
ing them  an  advantage  over  American  companies,  a  fact 
which  becomes  clear  when  we  reflect  that  the  eight  prin- 
cipal English  companies  doing  business  in  the  United 
States  to-day  have  assets  at  home  exceeding  $50,000,000. 
"The  financial  position  of  nearly  all  the  British  marine 
companies,"  according  to  the  Insurance  Supplement  to 
The  Statist,^  ''is  of  such  strength  that  even  an  unusually 
long  period  of  adversity  could  be  faced  with  equanimity. 
By  a  long  process  of  limiting  dividends  they  have  acquired 
funds  so  large  that  policy-holders  are  most  adequately 
secured,  while  at  the  same  time  the  interest  earnings  are 
sufficient,  or  nearly  sufficient,  to  pro^dde  for  the  main- 

»  Supplement  to  The  Statist,  May  6,  1905,  pp.  27  and  28. 


HISTORY  OF  MARINE  INSURANCE  323 

tenance  of  the  present  rate  of  dividends.  Thus  even  very 
moderate  trading  profits  are  amply  sufficient  steadily  to 
increase  the  financial  security.  ...  To  show  the  great 
and  increasing  financial  strength  of  the  marine  insurance 
companies  it  should  be  noted  that  the  accumulated  funds 
have  increased  38  per  cent,  during  the  decade  1893-1903, 
the  premium  income  has  only  risen  14  per  cent,  and  the 
proportion  of  the  former  to  the  latter  has  risen  from  177 
to  217  per  cent.  Thus  the  invested  funds  represent  over 
£2  for  every  £1  annually  received  from  policy-holders,  an 
exceedingly  satisfactory  position  from  all  points  of  view. 
...  In  fact,  the  financial  position  of  most  of  the  offices 
is  so  strong  that  temporary  profit  fluctuations  may  be 
disregarded,  and  in  many  cases  present  dividends  could  be 
maintained  even  if  the  companies  undertook  no  more 
business  whatever." 

The  truth  of  the  above  summary  is  borne  out  by  a  con- 
sideration of  the  dividends  paid  and  the  interest  earnings 
of  the  thirteen  principal  British  companies  (nearly  all  of 
which  operate  in  the  United  States)  during  the  years  1901 
to  1904.  The  last  three  years  of  this  period  have  been 
marked  by  a  severe  depression  in  the  shipping  industry, 
and  consequently  marine  profits  have  been  below  the 
average.  Yet  the  annual  dividend  of  only  two  of  these 
companies  averaged  as  low  as  6  and  7.5  per  cent.,  respec- 
tively, during  the  period;  in  six  companies  it  averaged 
between  10  and  20  per  cent.;  in  four  between  20  and  40 
per  cent.;  and  in  one  44.5  per  cent.  In  eight  companies 
the  average  annual  interest  earnings  on  the  accumulated 
funds  exceeded  the  large  dividends  paid,  and  in  the  re- 
maining five  were  nearly  as  large.  Moreover,  the  average 
annual  surplus  of  these  companies,  after  deducting  from 
the  net  premium  income  of  the  year  the  actual  losses  paid, 
all  expenses,  dividends,  and  ap})ro)')i'iations  to  the  sus- 
pense account,  aggregated  $1,708,000.  A  financial  show- 
ing of  this  kind  is  especially  significant  since  fluctuations 
in  income  are  inevitable  in  a  business  like  mai'ine  insurance 


324  YALE  READINGS  IN  INSURANCE 

where  the  rates  and  the  amount  of  business,  roughly  speak- 
ing, rise  and  fall  with  the  prosperity  or  depression  of  the  ship- 
ping industry,  the  most  sensitive  to  changing  industrial 
and  political  conditions  of  any  large  industry  in  the  world. 
English  companies  are  to-day  our  main  competitors,  but 
companies  of  other  countries,  notably  Germany  and 
Canada,  are  entering  the  ranks  against  us.  Even  on  the 
Pacific  coast  nineteen  foreign  companies,  unknown  to 
other  sections  of  the  country,  are  doing  business,  repre- 
senting England,  Germany,  France,  Italy,  Switzerland, 
China,  and  Japan. 

The  extent  to  which  foreign  companies  have  acquired 
control  of  marine  insurance  in  the  United  States  becomes 
especially  clear  if  one  examines  the  annual  financial  reports 
of  the  various  companies.  If  a  compilation  is  made  of 
the  statistics  as  found  in  these  reports,  it  will  appear  that 
for  the  year  1903  the  total  net  marine  risks  assumed  by  all 
the  foreign  and  domestic  companies  operating  in  the 
United  States  aggregated  approximately  $6,877,006,221, 
the  net  premiums  received  nearly  $18,000,000,  and  the 
admitted  assets  $112,912,000.  Of  these  amounts  the 
American  branches  of  the  twenty  leading  foreign  com- 
panies (to  say  nothing  of  the  large  number  of  foreign 
companies  operating  on  the  Pacific  coast)  wrote  $3,723,- 
000,000  of  the  risks,  or  54  per  cent,  of  the  total,  received 
$7,160,335  of  the  net  premiums,  but  possess  only  $21,733,- 
958,  or  less  than  one-fourth  of  the  admitted  assets.  Most 
of  these  foreign  companies  also  confine  themselves  solely 
to  the  writing  of  marine  risks,  only  six  of  the  above 
twenty  companies  transacting  a  fire  business  in  addition 
to  their  marine  business. 

Strikingly  different  is  the  situation  as  revealed  by  the 
statistics  collected  from  the  reports  of  American  fire  and 
fire-marine  companies.  Thus,  there  are  at  present  thirty- 
one  domestic  marine  and  fire-marine  companies  operating 
in  the  United  States,  writing  approximately  $3,153,000,000 
of  net  risks,  collecting  $10,703,000  of  net  premiums,  and 


HISTORY  OF  MARINE  INSURANCE  325 

possessing  $91,178,000  of  admitted  assets.  Yet  of  this 
large  number  of  companies,  it  must  be  remembered  tliat 
the  two  largest,  the  Insurance  Company  of  North  America 
and  the  Atlantic  Mutual  of  New  York,  write  over  one- 
third  of  the  total  risks  assumed  by  American  companies 
($1,220,000,000),  collect  nearly  one-half  of  the  total  pre- 
miums ($5,180,682),  and  possess  one-fourth  of  the  total 
assets  ($23,285,000).  Considering  the  eleven  largest  do- 
mestic companies,  comprising  only  one-third  of  the  total 
number,  it  appears  that  they  write  82  per  cent,  of  the 
total  risks,  and  own  83  per  cent,  of  the  total  assets.  The 
remaining  companies  are  of  so  little  significance  from  a 
marine  insurance  standpoint  that  they  may  be  eliminated 
for  all  practical  purposes,  a  fact  which  becomes  apparent 
when  it  is  remembered  that  fourteen  of  these  companies 
combined  collected  only  $83,592  in  premiums  in  1904. 

Unlike  the  foreign  companies  operating  in  the  United 
States,  the  domestic  companies  depend  much  more  largely 
on  a  fire  insurance  business  in  conjunction  with  their 
marine  business.  Only  five  of  the  thirty-one  domestic 
companies  devote  themselves  exclusively  to  marine  insur- 
ance, and  of  these  five  companies  only  two  can  be  classed 
as  important.  All  the  other  companies  combine  a  fire  insur- 
ance business  with  the  marine  business,  and  almost  without 
exception  place  much  greater  emphasis  upon  the  former 
than  upon  the  latter.  Thus  of  the  twenty-six  domestic 
fire-marine  companies  only  two  do  a  larger  marine  than 
a  fire  insurance  business;  in  two  other  companies  the 
marine  and  mland  bushiess  is  only  34  per  cent,  and  45  per 
cent,  as  large  as  the  fire  insurance  business;  in  three  only  22 
per  cent,  to  27  per  cent,  as  large;  in  two  only  11  per  cent,  and 
16  per  cent. ;  and  in  all  the  remaining  companies  less  than 
7  per  cent.  Combining  the  business  of  all  the  domestic 
marine  and  fire-marine  companies,  it  appears  that  they 
carry  nearly  three  times  as  much  fire  risk  as  marine  and 
inland  risks,  and  receive  nearly  four  times  as  much  in 
premiums  from  their  fire  as  from  their  marine  and  inland 


326  YALE  READINGS  IN   INSURANCE 

business.  Indeed,  there  are  many  fire  insurance  companies 
in  tlie  United  States  to-day  wliose  names  clearly  indicate 
that  they  were  at  one  time  fire-marine  companies  and 
whose  charters  originally  entitled  them  to  transact  a 
marine  insm-ance  business,  but  which  have  ceased  alto- 
gether to  underwrite  such  risks.  Moreover,  upon  inquiry, 
it  was  learned  from  a  considerable  number  of  companies 
that  their  marine  business  has  been  and  is  decreasing  in 
volume  owing  to  the  fact  that  large  foreign  marine  com- 
panies insure  entire  ship  cargoes,  leaving  only  small  amounts 
to  be  picked  up  by  the  smaller  companies.  Other  com- 
panies continue  to  carry  each  year  a  small  amount  of 
insurance  of  from  several  hundred  to  a  few  thousand 
dollars  in  premiums  for  the  sole  purpose  of  keeping  alive 
that  part  of  their  charter  which  permits  them  to  write 
marine  insurance. 

Continuing  our  investigation  still  further,  it  appears 
that  the  business  of  the  foreign  companies  operating  in 
the  United  States  is  by  no  means  limited  to  any  particular 
section  of  the  country,  but  is  general  throughout.  In  the 
Eastern  coast  states  of  Massachusetts,  New  York,  Penn- 
sylvania, and  New  Jersey,  where  over  one-half  of  the 
country's  total  marine  insurance  is  transacted,  the  busi- 
ness is  divided  nearly  half  and  half  between  domestic  and 
foreign  companies.  Domestic  companies  wrote  in  1903 
54  per  cent,  of  the  total  risks  and  earned  65  per  cent,  of 
the  net  premiums,  the  greater  part  of  the  insurance  being 
for  hulls  and  cargoes  of  American  vessels  engaged  in  the 
coastwise  trade.  The  business  of  foreign  companies,  on 
the  other  hand,  representing  46  per  cent,  of  the  risks  and 
35  per  cent,  of  the  premiums,  consists  in  very  large  measure 
of  insurance  on  the  cargoes  of  foreign  vessels  engaged  in 
our  foreign  trade. 

But  foreign  companies  have  by  no  means  confined  their 
activity  to  our  Eastern  coast,  as  might  at  first  be  supposed, 
but  have  boldly  extended  their  business  into  the  interior 
of  the  country,  until  to-day  they  control  the  greater  part 


HISTORY  OF  MARINE  INSURANCE  32t 

of  the  marine  insurance  business  of  the  Great  Lake  region. 
This  becomes  appai'ent  upon  an  examination  of  the  insur- 
ance statistics  as  pubhslied  by  the  insurance  departments 
of  Ohio,  Michigan,  Illinois,  Wisconsin,  and  Minnesota.  A 
tabulation  of  these  statistics  shows  that  the  nine  principal 
American  companies  operating  in  these  states  (and  they 
transact  nearly  all  the  business  dono  by  American  com- 
panies), wrote  $160,345,676  of  marine  risks  in  1903;  the 
local  companies  of  these  five  states  wrote  only  $5,394,358; 
while  the  thirteen  foreign  companies  which  have  entered 
these  states  wrote  $249,711,561.  In  other  words,  of  the 
$405,450,000  of  marine  risks  assumed  by  all  companies 
in  the  Lake  region,  foreign  companies  wrote  61.5  per  cent, 
and  received  53  per  cent,  of  the  total  premiums  collected. 

In  the  Gulf  region  the  influence  of  foreign  companies  is 
still  more  apparent,  judging  from  the  experience  of  the 
three  leading  commercial  states  of  Alabama,  Louisiana, 
and  Texas,  In  1904  the  marine  insurance  business  trans- 
acted by  all  companies  in  these  states  aggregated  $308,- 
508,895  of  risks  and  $1,648,000  of  premiums.  Of  this 
business  the  local  companies  wrote  only  4  per  cent.,  while 
all  American  companies  combined  represented  consider- 
ably less  than  one-fourth.  Foreign  companies,  however, 
repi'esenting  England  and  Germany,  wrote  over  75  per 
cent,  of  the  risks  and  received  nearly  83  per  cent,  of  the 
total  premiums. 

What  has  been  said  concerning  the  gradual  control  of 
marine  insurance  by  foreign  companies  on  our  Eastern 
coast  and  in  the  Lake  and  Gulf  regions  is  true  to  an  even 
greater  extent  on  the  Pacific  coast.  As  illustrative  of  the 
situation  here,  California  may  be  taken  as  the  example, 
since  over  four-fifths  of  the  insurance  on  the  Pacific  coast 
is  written  in  this  state.  Thus  a  review  of  the  last  report 
issued  by  the  insurance  department  of  California  shows 
that  in  1903  forty-six  companies  were  transacting  a  marine 
insurance  business  in  that  state,  and  that  of  this  large 
number    only    seven    were    American    companies,    while 


328  YALE  READINGS  IN  INSURANCE 

thirty-nine  represented  foreign  countries,  nine  being 
located  in  London,  seven  in  Liverpool,  seven  in  the  leading 
ports  of  Germany,  four  in  Hong  Kong,  three  in  Switzer- 
land, two  in  Australia  and  New  Zealand,  two  in  Canada, 
two  in  Shanghai  and  one  each  in  Paris,  Tokio,  and  Milan. 
Of  the  $210,500,000  of  marine  risks  written  in  California 
in  1903,  only  $31,500,000,  or  15  per  cent,  of  the  total,  was 
written  by  California  companies,  and  only  $11,500,000  or 
5.5  per  cent,  by  companies  of  other  states.  On  the  other 
hand,  the  companies  representing  foreign  countries  wrote 
$167,499,372  or  79.5  per  cent,  of  the  total  risks,  and  col- 
lected 73  per  cent,  of  all  the  premiums  paid.  Even  in 
the  State  of  Washington  where  the  aggregate  risk  assumed 
by  marine  companies  is  as  yet  very  small  (only  $18,069,683^ 
in  1903),  and  where  two  Western  companies,^  the  only 
American  companies  in  the  state,  have  had  control  of 
most  of  the  business,  eight  foreign  companies,  repre- 
senting England,  Germany,  Switzerland,  and  Canada  wrote 
nearly  one-thu'd  of  the  business  in  1904.  These  statistics 
show  conclusively  that  the  vast  bulk  of  the  marine  insur- 
ance business  on  the  Pacific  coast  is  now  controlled  by 
foreign  capital,  and  that  American  companies  have  gradu- 
ally been  forced  out  of  business  through  undue  competi- 
tion. Local  insurance  capital  and  earnings  have  always 
been  invested  in  buildings,  mortgages,  bonds,  etc.,  of  the 
state,  subject  to  taxation,  while  foreign  capital  for  many 
years,  as  President  Fowler,  of  the  Insurance  Company  of 
San  Francisco,  said  in  substance  in  1891,  "entered  the 
State  of  California  without  any  deposit  or  secm'ity  to  pro- 
tect the  policy-holders,  sending  its  earnings  to  the  head 
office,  and  not  contributing  one  dollar  toward  the  expenses 

1  In  addition  to  this  amount  marine  brokers  transacted  $3,591,485 
of  business  for  unauthorized  companies  during  the  year  1904,  thus 
giving  $21,661,168  of  net  risk  for  the  State  of  Washington  in  that 
year. 

'  Fireman's  Fund  Insurance  Company  (of  San  Francisco)  and  St. 
Paul  Fire  and  Marine  Insurance  Company. 


HISTORY  OF  MARINE  INSURANCE  329 

of  the  state  and  national  government,  thus  transacting 
business  in  CaHfornia  upon  more  favorable  and  advan- 
tageous terms  and  conditions  than  local  capital."^  Under 
such  circumstances,  President  Fowler  points  out,  that  it 
is  not  to  be  wondered  at  that  by  1891  twelve  California 
companies,  with  a  paid-up  capital  of  $5,600,000  and  with 
annual  fire  and  marine  premiums  of  $10,000,000,  had 
either  failed  or  retired  from  business;^  and  this  decrease 
in  the  number  of  local  companies,  be  it  noted,  has  con- 
tinued so  that  while  there  were  five  California  companies 
still  in  operation  in  1S91,  that  number  has  declined  to 
only  two  in  1903.  Moreover,  most  of  the  companies  to 
which  President  Fowler  referred  had  reinsured  in  foreign 
companies  with  the  result  that  upon  their  retirement  their 
business  simply  helped  to  increase  the  large  volume  of 
business  already  transacted  in  the  state  by  foreign  com- 
panies. 

But  while  the  number  of  foreign  companies  on  the 
Pacific  coast  and  the  volume  of  their  business  has  increased 
at  the  expense  of  domestic  companies,  it  should  be  noticed 
that,  despite  the  increasing  importance  of  San  Francisco 
and  other  Pacific  ports,  marine  insurance  as  transacted 
by  insurance  companies,  has,  as  a  whole,  shown  little 
tendency  to  increase  for  the  last  twenty  years  for  the 
reason,  as  pointed  out  by  the  Insurance  Commissioner  of 
California,  "that  nearly  all  of  the  steamship  companies 
owning  vessels  plying  in  and  out  of  San  Francisco  are 
organized  and  controlled  outside  of  the  state,  and  the 
tendency  of  these  corporations  is  either  to  carry  their  own 
insurance  or  place  it  outside  of  the  State  of  California, 
while  the  coasting  fleet  is  running  practically  without 
insurance.  In  addition  nmch  of  the  Oriental  business 
is  from  and  with  Atlantic  ports  and  is  insured  on  the 
Atlantic  side." 

■  For  President  Fowler's  remarks,  see  William  W.  Bates'  "American 
Marine,"  pp.  290-291. 
2  Ihid. 


330  YALE  RE.\DINGS  IN  INSURANCE 

Viewing  the  marine  insurance  business  of  the  United 
States  in  its  entirety,  it  is  clear  that  domestic  companies 
are  to-day  entirely  unable  to  meet  American  requirements. 
On  the  Eastern  coast  foreign  companies  claim  nearly  one- 
half  of  the  business.  The  same  is  true  to  an  even  greater 
extent  in  the  Lake  region;  while  in  the  Gulf  States  and  on 
the  Pacific  coast  approximately  four-fifths  of  the  business 
is  controlled  by  foreign  capital.  Even  in  our  coastwise 
trade,  the  one  branch  of  our  commerce  from  which  for- 
eigners have  been  excluded  by  statute  for  nearly  a  century, 
the  largest  buyers  of  insurance  place  it  almost  half  and 
half  between  domestic  and  foreign  companies.  Evidence 
before  the  United  States  Industrial  Commission  tends  to 
show  that  the  home  market  soon  becomes  exhausted,  and 
that  it  is  the  practice  of  the  principal  shipping  companies 
to  take  all  the  American  insurance  they  can  obtain,  and 
to  depend  upon  foreign  underwriters  for  the  rest. 

Recently  there  has  also  been  a  marked  tendency  toward 
self-insurance.  The  International  Mercantile  Marine  Com- 
pany, for  example,  embracing  some  of  the  largest  steam- 
ship lines  leaving  the  port  of  New  York,  announces  in  its 
report  of  December  31,  1903,  that  ''the  company  has 
inaugurated  a  system  of  insuring  its  own  ships  to  a  large 
extent,  it  being  deemed  that  this  could  be  done  advan- 
tageously and  safely  with  such  a  large  fleet  as  the  company 
commands."  (138  ships.)  Under  this  system  an  insurance 
fund  has  been  established  into  which  gross  premiums  were 
paid  in  1903,  amounting  to  $2,100,523  and  against  which 
all  losses  and  premiums  paid  for  additional  insurance  are 
charged.  The  insurance  department  of  the  company  in- 
sures the  vessels  owned  by  the  company  against  all  the 
marine  risks  usually  covered  by  insurance  companies,  at 
the  market  rate  for  the  various  services.  It  also  insures 
the  risks  on  freight  and  passage  money  in  connection  with 
its  own  business,  and  follows  the  custom  of  underwriters 
in  placing  with  regular  insurance  companies  for  its  own 
protection  a  portion  of  certain  large  risks  which  it  has 


HISTORY  OF  MARINE  INSURANCE  331 

assumed.  The  premiums  paid  in  by  the  various  steam- 
ship lines  are  placed  on  separate  accounts  with  two  bank- 
ing houses,  one  in  London  and  one  in  New  York,  and  thus 
kept  distinct  from  the  company's  operating  transactions. 
While  this  is  the  most  notable  recent  example  of  self- 
insurance,  it  should  be  remembered  that  this  method  was 
practised  on  a  large  scale  many  years  ago.  As  early  as 
1867,  we  are  informed  by  Mr.  Hopkins,  in  his  work  on  marine 
insm-ance  of  that  date,  that  the  Peninsular  and  Oriental 
Steamship  Company  possessed  not  only  an  insurance  sys- 
tem for  its  fifty-three  large  steamships,  but  also  insured 
its  passengers,  baggage  and  effects,  and  issued  policies  on 
goods.  I  am  informed  by  the  managers  and  officers  of 
the  largest  steamship  lines  that  self-insurance  is  prac- 
tised extensively  by  their  companies  in  one  form  or  another. 
While  the  coastwise  lines  and  the  smaller  trans-oceanic 
lines  depend  almost  entirely  upon  marine  insurance  com- 
panies for  their  insurance,  it  is  a  fact  that  in  the  case  of 
such  lines  as  the  great  German  steamship  companies  nearly 
all  the  insurance  is  carried  by  the  companies  themselves. 
It  is  the  general  rule,  however,  followed  by  the  German 
lines  as  well  as  the  International  Mercantile  Marine  Com- 
pany, that  they  refrain  from  insuring  the  cargo,  and  permit 
this  risk  to  be  covered  by  marine  insurance  companies. 


CHAPTER  XVIII 

THE   POLICY   CONTRACT   IN   MARINE   INSURANCE* 

The  more  direct  introduction  of  marine  insurance  in  the 
British  Isles  was  by  the  Lombards,  who  settled  in  that 
country  in  the  fourteenth  century.  In  London  they  were 
the  great  monej'^  lenders,  and  were  then  known  as  usurers. 
They  combined  with  their  business  of  banking  the  prac- 
tice of  marine  insurance.  The  form  of  "policy"  now 
used  appears  to  have  been  introduced  by  them  from  Italy. 
The  name  denotes  Italian  origin  and  is  supposed  to  mean  a 
promise.  The  policy,  being  thus  brought  down  from  medi- 
seval  times,  partakes  largely  of  the  quaint  language  of  an 
early  period.  An  English  judge  pronoimced  it  "an  absurd 
and  incoherent  instrument.  But  it  has  obtained  a  clear 
and  definite  meaning  through  a  prolonged  series  of  judi- 
cial decisions."  Almost  every  word  of  it  has  been  weighed 
in  the  judicial  balance  and  assigned  its  proper  value. 
Reference  is  made  to  the  remarks  made  by  Mr.  Justice 
Blackstone  in  his  celebrated  Commentaries:  "The  learn- 
ing relating  to  marine  insurance  has  of  late  years  been 
greatly  improved  by  a  scries  of  judicial  decisions  which 
have  now  established  the  law  in  such  a  variety  of  cases 
that  if  well  and  judiciously  collected  they  would  form  a 
very  complete  title  in  a  code  of  commercial  jurisprudence."  ^ 

Some  changes  have  been  introduced  into  the  form  of 
policy  used  in  the  United  States,  but  the  original  enumera- 

'  By  A.  A.  Raven,  President  of  the  Atlantic  Mutual  Insurance  Com- 
pany, New  York.  Reprinted  from  pp.  177-203  of  the  "Yale  Lec- 
tures on  Insurance,  Fire  and  Miscellaneous." 

i' Martin  on  the  "History  of  the  Lloyds." 

332 


MARINE  INSURANCE  POLICY  333 

tion  of  the  perils  insured  against  has  been  retained  and, 
I  believe,  is  used  by  all  marine  insurers.  Too  much  time 
would  be  required  to  give  a  complete  analysis  of  the  policy, 
but  a  few  reflections  may  be  necessary  to  throw  light  upon 
the  part  relating  to  the  risks  assumed  by  the  insurer. 
As  respects  that  part  of  the  contract,  the  policy  reads: 

"Touching  the  adventures  and  perils  which  the  said 
insurer  is  contented  to  bear  and  takes  upon  itself,  in  this 
voyage,  they  are  of  the  seas,  men  of  war,  fires,  enemies, 
pirates,  rovers,  thieves,  jettisons,  letters  of  mart  and  coun- 
ter-mart, reprisals,  takings  at  sea,  arrests,  restraints 
and  detainments  of  all  kings,  princes,  or  people  of  what 
nation,  condition  or  quality,  soever,  barratry  of  the  master 
and  mariners,  and  all  other  perils,  losses,  and  misfortunes 
that  have  or  shall  come  to  the  hurt,  detriment  or  damage 
of  the  said  goods  and  merchandise  or  any  part  thereof." 
The  perils  thus  enumerated  are  used  synonymously  with 
the  losses  arising  from  them. 

The  originators  of  the  policy  evidently  had  in  mind 
serious  perils  to  which  maritime  ventures  were  exposed 
from  the  violence  of  man,  both  as  a  marauder  and  in  the 
exercise  of  warlike  operations  which  in  early  times,  in  the 
latter  case,  were  almost  perpetual.  It  is  not  to  be  won- 
dered at  that  they  were  thus  apprehensive.  Piracy  and 
buccaneering  did  not  cease  with  the  dawn  of  a  higher 
civilization,  nor  were  such  practices  restrained,  but  con- 
tinued even  when  the  mediaeval  spirit  had  given  way  to 
nobler  purposes  in  other  respects,  for  we  find  that  as  late 
as  in  the  reign  of  Queen  Elizabeth  of  England,  that  sover- 
eign recognized  the  exploits  of  a  noted  marauder  and 
conferred  upon  him  the  honor  of  knighthood. 

Letters  of  Mart  and  Counter-mart.  —  The  first  is  author- 
ity to  make  reprisals  on  an  enemy's  property.  Com- 
missions were  given  by  governments  at  war  to  private 
vessels  to  make  such  reprisals  on  the  high  seas,  and  the 
practice  is  commonly  designated  privateering.  Letters  of 
counter-mart  represented  a  similar  authority  to  private 


334  YALE  READINGS  IN  INSURANCE 

expeditions  to  resist  those  empowered  to  make  captures 
through  letters  of  mart.  Both  of  these  came  under  the 
risk  of  war.  By  the  declaration  of  maritime  law  adopted 
at  the  Congress  of  Paris  in  1856,  this  system  of  preying 
upon  an  enemy's  property  upon  the  high  seas  by  privateers 
was  abolished.  The  United  kStates  and  Spain,  however, 
did  not  concur  in  the  declaration. 

Barratry  of  the  Master  and  Mariners.  —  The  word  bar- 
ratry appears  to  have  been  derived  from  the  Italian  "bar- 
ratatore,"  meaning  fraudulent  dealing,  fraud,  etc.,  and 
represents  all  dishonest  practices  whereby  the  ship-owner 
or  others  interested  are  defrauded.  The  ship  may  be 
wrecked,  fired,  or  abandoned  with  fraudulent  intent.  It 
is  to  be  observed  that  to  constitute  barratry  under  an 
insurance  the  owner  must  not  be  privy  to  nor  cognizant 
of  the  act.  Formerly  barratrous  acts  were  quite  com- 
mon, but  in  recent  years  they  have  become  rare  in  their 
heinous  form. 

The  scope  of  the  policy,  it  will  be  noticed,  is  exceedingly 
broad  and  the  terminal  expression,  ''and  all  other  perils, 
losses,  and  misfortunes,  that  have  or  shall  come  to  the  hurt, 
detriment,  or  damage  of  the  said  goods,  and  merchandise 
of  any  part  thereof"  would  indicate  a  further  broadening 
of  the  contract,  so  as  to  include  all  possible  perils;  but  the 
real  intent  and  meaning  of  the  policy  does  not  include  any 
other  perils  than  those  of  the  sea,  and  the  losses  for  which 
the  insurer  assumes  liability  are  those  which  are  caused 
from  those  perils  through  fortuitous  or  overpowering  cir- 
cumstances and  not  by  any  inherent  defect  in  the  subject 
insured.  This  latter  is  legally  termed  "vice  propre,"  as 
for  example,  any  article  that  during  the  ordinary  course 
of  transportation  necessarily  becomes  deteriorated  by  the 
inevitable  result  of  defects  in  itself.  Such  losses  are 
not  recoverable  in  marine  insurance.  It  will  be  observed 
that  hazards  named  "perils  of  the  sea,"  and  which  are 
contemplated  as  a  marine  venture,  are  those  resulting 
from  the  violent  action  of  the  elements,  —  all  casualties 


MARINE  INSURANCE  POLICY  335 

as  distinguished  from  the  ordinary  undisturbed  prosecu- 
tion of  the  voyage.  The  original  form  of  policy  did  not 
provide  any  limit  as  to  the  liability  of  the  insurer.  In 
the  course  of  time,  experience  demonstrated  the  necessity 
of  limiting  his  burden  and  excluding  from  the  policy 
liability  for  losses  arising  from  natural  causes  as  before 
referred  to.  In  the  year  1479  a  committee  of  Lloyds, 
London,  decided  upon  the  introduction  of  a  clause  in  the 
policy  known  as  the  "memorandum."  In  this  clause, 
the  various  articles  which  were  then  more  particularly 
subjects  of  insurance  were  divided  into  classes,  each  of 
which  was  subject  to  special  limitation.  The  first  class 
was  composed  of  articles  peculiarly  susceptible  to  dam- 
age, viz.:  corn,  fish,  salt,  fruit,  flour,  and  seed.  With 
respect  to  these  articles,  claim  for  damage  or  partial  dam- 
age was  excluded,  unless  the  vessel  stranded.  The  second 
class  consisted  of  articles  less  liable  to  damage,  such  as 
sugar,  tobacco,  hemp,  flax,  hides,  and  skins.  As  to  these 
goods,  liability  for  damage  was  excluded  unless  amount- 
ing to  5  per  cent.  The  third  class  included  all  other  goods 
as  well  as  the  vessel  and  freight.  These  were  insm-ed 
excluding  liability  mider  3  per  cent,  unless  the  vessel 
stranded.  A  similar  clause  was  introduced  in  their  pol- 
icies by  American  insurers  in  1840,  but  the  articles  ex- 
cluded as  to  damage  were  considerably  increased.  At 
that  time  the  importations  into  the  United  States  were 
made  up  of  articles,  some  of  which  were  regarded  as  pecul- 
iarly susceptible  of  damage.  More  recently  these  condi- 
tions have  been  materially  modified,  and  changes  have 
been  made  to  conform  to  the  requirements  of  commerce, 
and  extra  premiums  to  cover  the  increased  liability  have 
been  charged. 

In  the  early  practice  of  marine  insurance,  the  applicant 
prepared  the  policy  on  a  foim  furnished  to  him  and  sub- 
mitted it  to  the  insurer  and,  if  accepted  by  the  latter,  he 
signed  it,  and  thus  he  became  what  is  now  known  as  "the 
underwriter."    The  contract  is  signed  by  the  underwriter 


336  YALE  READINGS  IN  INSURANCE 

only,  but  the  assured  also  assumes  certain  obligations. 
It  is  quite  manifest  that  good  faith  is  an  essential  element 
in  negotiating  all  contracts,  but  peculiarly  so  in  one  involv- 
ing such  exceptional  obligations  and  so  complex  in  its 
character  as  a  contract  of  marine  insurance.  Everything 
material  to  the  risk  must  of  necessity  be  frankly  imparted 
to  the  underwriter  and  he,  in  turn,  should  carefully  con- 
sider the  interest  of  the  assured  when  he  accepts  the  risk. 
In  the  matter  of  valuation,  the  assured  is  entitled  to  insure 
his  full  interest  in  the  venture,  but  he  is  not  warranted 
in  placing  an  excessive  value  on  the  property.  If,  how- 
ever, the  underwriter  agrees  upon  a  specified  valuation, 
it  is  binding  imless  there  be  fraud.  Misrepresentation 
or  withholding  anything  vital  to  the  risk  vitiates  the 
insurance. 

An  insurance  may  be  made  by  the  party  in  interest  or 
through  an  agent.  The  practice  is  to  submit  particulars 
of  the  venture  on  which  insurance  is  desired  to  the  under- 
writer. A  formal  application  is  then  prepared,  outlining 
the  details.  This  preliminary  paper  is  signed  by  the 
applicant,  and  if  the  risk  is  accepted  by  the  underwriter, 
he  also  signs  it,  and  thus  the  contract  is  binding  and  the 
policy  is  subsequently  issued,  but,  as  before  intimated, 
the  policy  is  signed  by  the  underwriter  only. 

There  are  also  implied  warrantees,  three  in  number, 
binding  on  the  assured,  although  not  incorporated  in  the 
policy.  The  first  is  that  the  ship  or  vessel  is  seaworthy; 
second,  that  she  is  to  proceed  without  unnecessary  delay 
from  the  port  of  departure  direct  to  the  port  of  destina- 
tion; third,  that  she  is  not  to  engage  in  any  illicit  trade 
and  conforms  to  all  the  requirements  of  law  as  respects 
her  credentials. 

As  to  the  first  of  these,  that  is,  the  warranty  of  seaworthi- 
ness, the  owner  is  under  obligation  to  prepare  her  in  all 
respects  for  the  contemplated  voyage,  that  is,  on  sailing, 
she  must  be  tight  and  stanch  in  her  hull,  properly  rigged 
(if  a  steamer,    her  machinery  must    be    in    good  work- 


MARINE  INSURANCE  POLICY  337 

ing  condition);  she  must  have  an  ample  supply  of 
fuel,  she  must  be  stored  with  provisions  and  provided 
with  competent  master  and  crew,  with  all  things  neces- 
sary for  the  intended  voyage.  Her  cargo  also  must  be 
properly  stowed  and  not  in  excess  in  weight  over  what 
she  can  prudently  carry.  In  fine,  everything  pertaining 
to  the  ship,  her  equipment,  and  cargo,  must  be  on  the  line 
to  insure  safety,  thus  recognizing  the  obligation  the  ship 
owner  has  to  the  public,  either  as  shipper  of  cargo  or  as 
passenger, 

A  careful  consideration  of  these  implied  warrantees 
as  required  by  the  common  law  will  suggest  to  us  both  the 
wisdom  and  justice  of  them.  It  is  proper  to  observe  that 
the  original  form  of  bills  of  lading  used  in  the  shipment  of 
cargo  gave  no  immunity  to  the  ship-owner  for  loss  or  dam- 
age to  the  property  shipped,  except  in  respect  of  losses 
caused  by  perils  beyond  the  control  of  man  to  prevent 
or  overcome,  but  in  recent  years  attempts  (as  expressed 
by  ^  a  United  States  judge)  have  been  made  to  limit  as 
far  as  possible  the  liability  of  the  vessel  and  her  owners 
by  inserting  in  bills  of  lading  stipulations  against  losses 
arising  from  her  unseaworthiness,  and  stowage  and  negli- 
gence in  navigation,  and  other  forms  of  liability  which 
have  been  held  by  the  courts  of  England,  if  not  of  this 
country,  to  be  valid  as  contracts  and  to  be  respected  even 
when  they  exempted  the  ship  from  the  consequences  of 
her  own  negligence. 

As  decisions  were  made  by  the  courts  from  time  to 
time,  holding  the  vessel  for  non-excepted  liabilities,  new 
clauses  were  inserted  in  the  bills  of  lading  to  meet  these 
decisions,  until  the  common  law  responsibility  of  carriers 
by  sea  had  been  frittered  away  to  such  an  extent  that 
several  of  the  leading  commercial  associations,  both  in 
this  country  and  in  England,  had  taken  the  subject  in 
hand   and   suggested    amendments   to   the   maritime   law 

'  Justice  Brown  of  U.  S.  Supreme  Court  in  case  of  "  The  Delaware," 
161,  U.  S.,  471. 


338  Y.\LE  READINGS  IN   INSURANCE 

in  line  with  those  embodied  in  the  Harter  Act.  The  act 
referred  to  bears  the  name  of  its  author  and  was  passed 
by  the  Congress  of  the  United  States  in  February,  1893. 
It  renders  null,  void,  and  of  no  effect  any  clause,  covenant, 
or  agreement,  whereby  the  ship-owner  shall  be  relieved  from 
liability  for  loss  or  damage  arising  from  negligence,  fault, 
or  failure  in  proper  loading,  stowage,  custody,  care,  or 
proper  delivery  of  any  and  all  lawful  merchandise  or  prop- 
erty committed  to  his  charge. 

The  same  act  provides,  that  if  the  owner  of  any  vessel 
transporting  merchandise  to  or  from  any  port  in  the  United 
States  shall  exercise  due  diligence  to  make  the  vessel  in 
all  respects  seaworthy  and  properly  manned,  equipped, 
and  supplied,  that  he  shall  not  become  or  be  held  respon- 
sible for  damage  or  loss  resulting  from  faults  or  errors  in 
navigation  or  in  the  management  of  said  vessel. 

It  will  be  observed  that  the  common  law  requirement  as 
to  seaworthiness,  in  other  respects,  is  not  abridged  nor 
affected  by  the  act,  but  much  greater  latitude  is  given  in 
Great  Britain  to  what  is  termed  ''special  contract"  in 
bills  of  lading.  While  this  immunity  from  obligation 
certainly  protects  the  ship-owner,  it  can  hardly  be  said  to 
be  in  the  interests  of  the  public. 

As  to  the  second  warranty,  namely,  making  a  direct 
passage,  since  the  introduction  of  steam  the  modern  form 
of  bill  of  lading  which  is  alleged  to  be  a  special  contract 
gives  liberty  to  deviate  to  any  extent,  so  that  with  respect 
to  steamers,  at  least,  that  warranty  is  largely  modified. 

As  to  the  premiums  charged  for  the  various  risks,  the 
rate  in  each  case  is  dependent  upon, 

1.  The  character  of  the  vessel;  this  is  deemed  an 
important  factor. 

2.  The  nature  of  the  cargo. 

3.  The  dangers  peculiar  to  the  ports  of  loading  and 
destination. 

Any  underwriter  is  supposed  to  be  familiar  with  the 
physical  conditions  of  the  different  commercial  ports  of 


MARINE  INSURANCE  POLICY  339 

the  world,  as  well  as  the  nature  of  their  products,  the 
means  employed  in  loading  and  unloading  the  vessel,  the 
direction  to  be  taken  by  the  vessel  in  her  voyage  and 
the  time  consumed  in  making  it.  These  are  the  elemen- 
tary features  of  his  qualifications.  To  say  that  he  should 
also  possess  a  discriminating  mind  and  the  power  of  dis- 
cerning occult  conditions  would  be  but  the  corollary  of 
his  required  attainments. 

The  word  "average"  frequently  occurring  in  connection 
with  marine  insurance  may  be  here  explained.  It  is 
difficult  to  trace  the  origin  of  the  meaning  as  now  applied, 
but  the  use  of  it  in  maritime  affairs,  particularly  in  insur- 
ance, doubtless  suggests  a  contribution  in  a  sea  venture. 
Particular  average  in  marine  insurance  is  damage  to  or 
partial  loss  of  particular  goods  insured  for  which  a  contri- 
bution may  be  due  from  the  underwriter.  As,  for  example, 
A  insured  ten  cases  of  dry  goods.  On  arrival  at  destina- 
tion, one  or  all  the  cases  are  found  to  be  damaged  by  perils 
of  the  sea;  that  would  be  "particular  average";  or,  if  any 
number  of  the  cases  short  of  the  whole  were  totally  lost, 
that  would  also  be  particular  average,  but,  in  the  latter 
case,  under  certain  conditions,  it  might  be  considered  a 
"constructive  total  loss."    This  will  be  hereafter  explained. 

"General  average"  is  a  contribution  due  from  all  inter- 
ests in  the  venture,  and  if  insured,  recoverable  from  the 
insurer.  General  average  occurs  under  the  following 
circumstances:  If  during  the  voyage  sacrifice  be  made  of 
any  part  of  the  ship  or  cargo,  or  any  extraordinary  ex- 
pense incurred  to  prevent  loss  of  the  whole  or  to  rescue  the 
whole  adventure  from  unusual  peril,  of  if  the  ship  be  on 
fire  and  water  is  poured  into  the  hold  to  extinguish  the 
fire,  the  cargo  damaged  by  the  water  would  be  general 
average,  but  the  cargo  damaged  by  fire  only  would  be 
particular  average,  because  the  damage  from  that  cause 
was  accidental. 

Likewise,  if  the  ship  should  be  thrown  on  her  beam 
ends  by  shifting  of  her  cargo,  or  from  any  other  cause,  and 


340  YALE  READINGS  IN  INSURANCE 

her  spars  are  cut  away  to  right  her,  or  the  hatches  are 
opened  and  part  of  her  cargo  is  jettisoned,  i.e.,  thrown 
overboard  to  relieve  her,  the  sacrifice  so  made,  inckiding 
the  attending  loss  or  damage  in  making  it,  would  be  con- 
tributed for  in  general  average. 

The  form  of  sacrifice  termed  "jettison"  is  more  fre- 
quently resorted  to  than  any  other,  and  is  perhaps  the 
one  that  can  more  readily  be  made.  When  the  hatches 
are  opened  for  that  purpose,  if  any  of  the  cargo  is  damaged 
by  water  getting  in  to  the  hold,  such  damage  is  also  contrib- 
uted for  in  general  average.  There  is  particular  interest 
attached  to  sacrifice  by  jettison,  as  it  is  one  of  the  earliest 
recorded  in  maritime  ventures  and  was  at  first  probably 
the  only  one  recognized  hi  the  system  of  general  average. 

The  principle  of  sacrifice  enjoins  that  when  made  it 
shall  be  the  most  weighty  and  of  the  least  valuable  of  the 
cargo,  but  in  an  emergency  requiring  such  prompt  action 
the  proper  selection  cannot  always  be  made.  If  the  goods 
sacrificed  are  insured,  the  assured  can  recover  from  his 
underwriter,  assigning  to  him  his  right  for  contribution  in 
general  average.  The  underwriter  also  is  liable  for  the 
general  average  contribution  on  property  insured  by  him 
according  to  the  sum  insured,  unless  specially  excluded 
in  the  policy.  Cargo  laden  on  deck,  if  jettisoned,  is  not, 
as  a  rule,  contributed  for  in  general  average. 

General  average,  as  before  mentioned,  is  a  part  of 
maritime  law,  and  all  commercial  nations  have  endeavored 
to  bring  its  practice  within  the  highest  rules  of  equity, 
adapting  it  to  various  principles  as  they  are  unfolded 
from  time  to  time.  Several  international  congresses 
have  been  held  for  the  consideration  of  the  subject,  no- 
tably, those  at  York,  England,  in  1864;  and  at  Antwerp 
in  1877.  At  the  latter  congress  a  new  code  was  adopted 
and  designated  York-Antwerp  Rules.  This  code  is  fre- 
quently referred  to  as  a  basis  of  agreement  in  general 
average  questions.  But  the  practice  as  respects  minor 
details  varies  somewhat  in  different  countries. 


MARINE  INSURANCE  POLICY  341 

Salvage  is  also  a  charge  upon  the  property  saved.  The 
word  salvage  has  a  dual  meaning.  The  dictionaries  give 
the  definition  as  "the  compensation  allowed  to  persons 
by  whose  voluntary  exertions  the  vessel  or  cargo  or  the 
lives  belonging  to  her  are  saved  from  danger  or  loss  in 
case  of  wreck,  capture,  or  other  marine  misadventure"; 
and  also  that  "which  is  savcnl  from  the  wrecked  or  aban- 
doned vessel."  It  will  be  noticed  that  both  the  com- 
pensation for  saving  and  that  which  is  saved  is  termed 
salvage. 

As  an  illustration  of  the  operations  of  salvage,  various 
cases  might  be  cited,  but  one  quite  illustrious,  and  which 
has,  to  some  extent,  been  made  the  subject  of  romance, 
may  be  mentioned. 

The  brig  "Mary  Celeste"  sailed  from  New  York  on 
November  7,  1872,  destined  for  Genoa,  Italy,  with  a  cargo 
consisting  of  1700  barrels  of  alcohol.  The  captain  was 
accompanied  by  his  wife,  and  his  child,  and  the  vessel 
had  a  crew  of  seven  persons.  There  were  two  passengers 
on  the  vessel.  On  the  27th  of  November,  in  latitude  38 
north  and  longtitude  17  west,  the  brig  was  sighted  by  the 
brig  "  Dei  Gratia,"  and  when  boarded  by  a  part  of  the  crew 
of  that  vessel,  no  one  was  found  on  the  "Mary  Celeste," 
although  under  full  head  of  sail  she  appeared  to  have  been 
sailing  that  way  for  three  days.  The  last  entry  in  the 
log  book  was  made  on  the  24th  of  November.  Her  fore 
hatch  was  off,  and,  with  the  exception  of  the  boats  being 
missing,  everything  denoted  perfect  order.  The  indica- 
tions were  that  the  people  which  were  on  her  had  left 
suddenly  in  the  boats.  She  was  towed  into  Gibraltar, 
the  nearest  port,  and  there  the  Admiralty  Court  awardcvl 
a  salvage  of  £1700  —  the  equivalent  of  about  $8300. 
This  was  a  moderate  compensation,  being  only  about 
18  per  cent,  on  an  aggregate;  value  of  $47,000  for  vessel, 
freight,  and  cargo.  It  is  not  unusual  when  derelicts,  i.e., 
abandoned  vessels,  are  picked  up  at  sea,  for  a  salvage 
award  of  more  than  twice  that  percentage  to  be  made  to 


342  YALE  READINGS  IN  INSURANCE 

the  salvors.  No  tidings  have  ever  been  received  of  the 
people  who  sailed  in  this  vessel,  although  the  government 
used  every  means  in  its  power  to  ascertain  what  had 
become  of  them. 

Savings  of  property  from  shipwreck  are  also  termed 
salvage. 

We  will  now  revert  to  the  policy.  The  conditions  in 
it  are  frequently  changed  by  written  clauses  conforming 
to  what  is  specially  agreed  upon  between  the  assured  and 
the  underwriter.  In  order  to  reduce  the  cost  of  insurance, 
or  for  other  reasons,  the  merchant  may  request  the  insur- 
ance made  "free  of  particular  average,"  which  means  that 
the  underwTiter  will  be  relieved  from  liability  for  damage 
or  partial  damage  to  the  goods.  An  insurance  so  made 
covers  total  loss  and  general  average  contribution.  Gen- 
eral average  is  payable  by  the  owner  even  though  the 
goods  be  not  insured.  If  insured  the  underwriter  is  liable 
for  it,  because  the  sacrifice  or  expense  was  incurred 
to  save  the  venture  from  a  total  loss.  The  condition, 
"free  of  particular  average,"  is  now  qualified  in  most  insur- 
ances by  adding  "unless  the  vessel  be  stranded,  sunk, 
burned,  or  in  collision."  It  is  a  form  of  clause  intro- 
duced in  the  English  policies.  Some  American  insurers 
use  the  words,  — "  unless  caused  by  the  perils  enumer- 
ated," that  is,  stranding,  etc.,  thus  eliminating  the  uncer- 
tainty as  to  the  cause  of  damage. 

The  difference  between  the  two  forms  may  be  explained 
as  follows:  If  cargo  be  insured  under  the  English  clause, 
free  of  particular  average  unless  the  vessel  be  stranded, 
etc.,  and  while  the  vessel  is  proceeding  out  of  her  port  of 
loading,  touches  bottom  and  remains  ashore,  even  for  a 
brief  period,  without  sustaining  any  injury,  it  would  be 
deemed  a  case  of  stranding,  and  although  the  cargo  might 
not  be  damaged  or  injured  in  any  form  by  such  stranding, 
yet  the  fact  of  that  innocuous  stranding  would  cause  a 
change  in  the  policy,  and  the  cargo  insured  would  then  be 
subject  to,  instead  of  free  of,  particular  average,  and  for 


MARINE  INSURANCE  POLICY  343 

any  damage  sustained  by  heavy  weather  on  the  passage, 
the  underwriter  would  be  Uable. 

Any  writing  in  the  policy  takes  precedence  of  the 
printed  part  to  which  it  is  opposed,  and  sometimes  printed 
clauses  in  red  are  introduced  in  the  policy  to  nullify  certain 
printed  conditions  in  the  body  of  the  policy.  For  example, 
the  risk  of  capture  and  other  warlike  measures,  are  named 
as  perils  insured  against,  but  a  side  clause,  when  inserted 
in  the  policy,  exonerates  the  insurer  from  liability  from 
such  losses,  risks  of  war  and  all  losses  incidental  to  war,  and 
when  by  reason  of  the  actual  existence  of  war  the  mer- 
chant deems  it  necessary  to  have  that  risk  covered,  when 
agi'eed  upon  with  the  underwriter  the  exonerating  clause 
is  waived,  thus  restoring  the  policy  to  its  normal  condi- 
tion and  covering  the  war  risks.  When  that  risk  is  as- 
sumed by  the  underwriter,  a  large  premium  is  added  to 
the  ordinary  marine  premium.  The  risk  of  war  is  deemed 
gi'eater  than  all  the  other  perils  enumerated  in  the  policy, 
thus  showing  that  the  winds  and  waves  and  the  raging  of 
the  sea  do  not  equal  the  destructive  tendencies  of  man 
when  his  frenzy  is  aroused.  During  our  Civil  War  one 
insurance  company  paid  nearly  $2,000,000  in  losses  for 
war  risks,  and  the  Confederate  cruisers  destroyed  by  burn- 
ing at  sea  18  ships,  7  barks,  4  schooners,  1  brig,  and  1 
steamer  —  31  vessels  in  all,  and  about  the  closing  of  the 
war  one  of  the  same  cruisers  proceeded  to  the  Arctic 
Ocean  and  destroyed  15  whalers.  It  is  estimated  that 
the  amount  of  property  destroyed  on  the  high  seas  by 
Confederate  cruisers  aggregated  over  $20,000,000. 

The  printed  form  of  policy  insuring  vessel,  freight, 
cargo,  or  profits  is  essentially  the  same.  It  differs  only 
as  it  is  adapted  to  apply  to  the  character  of  the  respective 
interests  insured.  There  is,  however,  a  special  name  given 
to  each  policy,  corresponding  with  the  risk  it  is  designed 
to  cover.  For  example,  the  policy  insuring  a  risk  for  a 
single  voyage,  as  from  New  York  to  Liverpool,  is  called  a 
voyage  policy. 


344  YALE  READINGS  IN  INSURANCE 

A  time  policy  insures  a  vessel  for  a  specified  time,  usu- 
ally for  one  year.  In  Great  Britain,  no  insurance  can  be 
legally  made  for  a  longer  period  than  one  year  at  a  time. 
No  such  legal  enactment  prevails  in  the  United  States. 

A  valued  policy  is  one  giving  a  definite  value  to  the 
property  insured.  An  open  policy  is  one  where  the  value 
is  left  open  to  be  determined  when  ascertained  upon  receiv- 
ing the  shipping  documents.  A  floating  policy  covers  by 
vessel  or  vessels,  either  sailing  or  steam,  and  insures  the 
goods  as  soon  as  shipped.  Details  of  each  shipment,  when 
received  by  the  consignee,  are  reported  to  the  insurer  and 
premium  is  charged  thereon.  This  latter  class  of  policy 
is  rendered  necessary  in  the  business  of  importers,  who 
frequently  order  their  goods  several  months  in  advance  of 
the  time  of  shipment,  and  they  are  not  usually  advised 
of  the  shipments  until  the  goods  arrive. 

A  wager  policy  is  one  that  shows  on  the  face  of  it  that 
the  assured  has  no  interest  in  the  property.  This  class  of 
insurance,  that  is,  one  without  interest,  has  been  quite 
common  in  England,  but  during  the  reign  of  George  III., 
under  statute  19,  insurance  without  interest  was  declared 
illegal,  but  such  insurances  are  still  made  on  the  basis  of 
what  is  termed  honor  transactions.  In  the  United  States 
it  would  be  difficult,  indeed,  to  recover  in  any  of  the 
courts  under  a  policy  where  the  principals  had  no  interest 
in  the  property  insured.  It  is  to  be  observed  that  an 
interest  in  the  property  is  an  indispensable  condition  of 
all  modern  insurance. 

As  touching  the  duration  of  the  various  classes  of  risks, 
the  policy  reads:  "Beginning  the  adventure  upon  said 
goods  and  merchandises  from  and  immediately  following 
the  loading  thereof  on  board  of  the  said  vessel."  The 
goods  thus  insured  are  covered  from  the  time  that  they 
are  loaded  on  the  vessel,  but,  in  some  cases,  the  ships  are 
not  lying  at  the  wharf,  and  therefore  the  goods  so  insured 
are  transported  in  lighters  to  the  vessel.  In  such  cases 
the  risk  of  lighterage  is  included.     As  to  the  termination. 


MARINE  INSURANCE  POLICY  345 

it  says:  "And  so  shall  continue  and  endure  until  the  said 
goods  and  merchandises  shall  be  safely  landed  at  the 
destination,"  so  that,  if  the  goods  are  lightered  from  the 
vessel  to  the  shore,  that  part  of  the  risk  would  also  be 
covered.  The  risk  of  lighterage  is  by  no  means  an  imma- 
terial one.     Losses  on  lighters  are  not  infrequent. 

The  great  advance  made  in  the  construction  of  ships  as 
well  as  the  improved  condition  in  navigating  them  has 
materially  minimized  maritime  risks,  but  one  dreaded 
cause  of  disasters  on  the  ocean  is  that  of  collision.  The 
construction  of  large  steamships,  commonly  known  as 
"greyhounds,"  has  added  immensely  to  the  attractions 
and  speed  of  modern  travel.  We  can  hardly  realize  the 
progress  made  in  naval  architecture  nor  can  the  advance 
in  the  science  of  navigation  be  fully  estimated.  Not 
unlike  everything  else  in  modern  life,  we  have  obtained 
these  at  the  cost  of  increased  danger.  The  experienced 
navigator  may  be  serene  in  a  terrific  storm,  when  the 
violence  of  the  wind  and  the  waves  may  appall  the 
affrighted  landsman,  for  the  sailor  knows  his  ship  and  has 
faith  in  her  power  to  overcome  all.  When,  however,  he 
is  beset  by  fog,  there  is  no  escape  but  to  pass  through  it, 
and  in  doing  so  he  knows  not  what  he  will  encounter.  His 
experience  and  skill  are  of  no  avail  in  this  emergency.  He 
may  carefully  observe  all  the  rules  and  recpirements  of  mari- 
time law,  as  well  as  those  enjoined  by  experience,  but  the 
mistakes  and  omissions  of  others  he  cannot  foresee.  He 
is  plunging  in  the  dark,  and  how  frequently  it  has  happened 
that,  when  thus  enveloped  in  apparent  darkness,  dire 
disaster  has  been  the  consequence,  through  the  faults  of 
others,  when  he  himself  has  made  all  the  sacrifices  within 
human  power  to  prevent  the  possibility  of  such  a  fatal 
result.  Collisions  at  sea  are  therefore  regarded  as  one 
of  the  great  perils  of  modern  navigation.  It  was  not  until 
within  the  past  half  century  that  the  question  assumed  a 
legal  form  as  to  tht;  liability  of  a  ship-owner  for  damage 
inflicted  on  other  ships  or  vessels  through  collision.    Rules 


346  YALE  READINGS  IN  INSURANCE 

of  the  road  have  been  clearly  defined  and  the  requirements 
in  cases  of  fog  have  been  very  carefully  outlined,  but  it 
can  readily  be  seen  that  the  consequences  of  disaster  to  a 
valuable  ship  would  result  in  immense  loss  to  the  ship- 
owner, whose  vessel  had  sunk  another.  Therefore  legis- 
lation has  come  to  his  assistance,  and  in  Great  Britain  the 
following  statutory  law  has  been  enacted : 

''Where  any  loss  or  damage  is  caused  to  any  other  vessel, 
or  to  any  goods,  merchandise,  or  other  thing  whatsoever 
on  board  any  other  vessel,  by  reason  of  the  improper 
navigation  of  a  ship  in  respect  of  loss  or  of  damage  to 
vessel,  goods,  merchandise,  or  other  things,  whether 
there  be  in  addition  loss  of  life  or  personal  injury  or  not, 
an  aggregate  amount  not  exceeding  £8  —  for  each  ton  of 
their  ship's  tonnage,  £7  —  addition  for  loss  of  life  or 
personal  injury.  The  tonnage  of  a  ship  shall  be  her 
gross  tonnage,  without  deduction  on  account  of  engine- 
room,  and  the  tonnage  of  a  sailing  vessel  shall  be  her 
registered  tonnage."     (Merchants'  Shipping  Act,  1894.) 

The  law  of  the  United  States  on  the  same  subject  reads 
as  follows: 

"The  liability  of  the  owner  of  any  vessel  for  any  em- 
bezzlement, loss,  or  destruction  by  any  person  of  any 
property,  goods,  or  merchandise  shipped  or  put  aboard 
of  such  vessel,  or  for  any  loss,  damage  or  injury  by  colli- 
sion, or  for  any  act,  matter  or  thing,  loss,  damage  or  for- 
feiture done,  occasioned  or  incurred  without  the  privy  or 
knowledge  of  such  owner  or  owners,  shall  in  no  case  exceed 
the  amount  or  value  of  the  interest  of  such  owner  in  such 
vessel,  and  her  freight,  then  pending."  (Revised  Statute 
4283,  Bureau  of  Navigations,  1903.) 

It  will  be  noticed  that  in  the  English  law  the  liability  is 
defined  according  to  the  size  of  the  vessel,  that  is,  her 
tonnage,  while  in  the  United  States  it  is  her  entire  value, 
which  is  to  be  determined  when  the  legal  proceedings  have 
resulted  as  to  the  liability  of  the  owner  for  the  loss.  The 
ordinary  form  of  policy  does  not  cover  liability  of  the  owner 


MARINE  INSURANCE  POLICY  347 

for  damage  inflicted  to  other  vessels  by  collision,  through 
the  fault  of  his  vessel.  In  order  to  protect  himself,  special 
insurance  is  made,  which  in  some  cases  has  been  coupled 
with  the  policy  insuring  the  vessel  against  ordinary  risks. 
In  most  cases  such  insurance  covers  only  three-fourths  of 
the  owner's  liability  for  loss,  leaving  him  to  assume  one- 
fourth  of  it,  so  that  he  will  exercise  diligence  and  care  in 
the  selection  of  competent  and  suitable  navigators  for 
his  vessel. 

It  will  be  noticed  that  the  foregoing  relates  to  the  dam- 
age inflicted  on  the  other  vessel.  The  damage  received 
by  the  insured  vessel  comes  under  the  hability  of  the  under- 
writer on  that  vessel.  When  it  is  legally  determined 
which  of  the  colliding  vessels  is  at  fault,  the  liability  for 
loss  will  fall  upon  the  one  found  to  be  at  fault.  By  the 
rules  of  law  administered  at  the  Court  of  Admiralty,  when 
both  vessels  are  to  blame,  even  though  not  in  equal  degrees, 
the  whole  loss  sustained  by  their  owners  is  apportioned 
equally  between  the  two.  Each  party  becomes  liable  to 
pay  to  the  other  one-half  of  the  damage  which  he  has 
sustained.^ 

Next  to  collision  and  probably  the  greatest  menace  to 
ocean  navigation  is  fire.  This  peril  is  so  subtle  and  diffi- 
cult to  overcome  that  it  assumes  an  appalling  character. 
It  is  not  only  the  direct  cause  of  heavy  marine  losses,  but 
is  frequently  attended  with  serious  loss  of  human  life. 
In  recent  years  means  have  been  employed  through  skil- 
ful inventions  to  locate  fire  in  the  hold  of  a  vessel  and  to 
smother  it,  but  these  means  have  not  always  proved  effec- 
tive. 

An  insurance  made  free  of  general  and  particular  average 
reduces  the  liability  under  the  policy  to  total  loss  only, 
but  there  are  various  conditions  in  which  the  property 
may  not  be  absolutely  lost  and  yet  be  regarded  a  total 
loss  under  the  policy.  There  might  be  what  is  technically 
termed  "constructive  total  loss."     An  actual  total  loss 

>  Carver  on  "Carriage  by  Sea." 


348  YALE  READINGS  IN  INSURANCE 

is  when  the  property  insured  is  actually  lost  or  destroyed 
by  the  perils  insured  against.  Constructive  total  loss 
may  arise  when,  by  any  of  the  perils  named  in  the  policy, 
the  voyage  cannot  be  performed  or  the  property  is  so 
damaged  as  to  be  of  little  value,  or  the  expense  to  forward 
it  to  destination  would  be  equal  to  or  exceed  the  value 
of  the  property,  necessitating  its  sale  at  an  intermediate 
port.  In  such  a  case  the  assured  can  claim  a  total  loss 
under  his  policy.  The  same  principle  applies  to  insur- 
ances on  the  hulls  of  vessels.  If  an  insured  vessel  is 
seriously  damaged  through  perils  insured  against  and  the 
cost  of  repairing  her  exceeds  her  value,  the  assured  may 
abandon  her  to  the  underwriter  and  claim  as  for  a  total 
loss  mider  his  policy. 

Insurance  on  a  vessel  for  a  voyage  only  commences 
after  it  is  made,  the  vessel  being  then  in  port,  either  load- 
ing or  ready  to  load,  and  terminates  twenty-four  hours 
after  her  arrival  at  the  port  of  destination  and  being  moored 
therein  in  good  safety.  Insurance  on  freight  (this  interest 
represents  the  earnings  of  the  vessel  for  carrying  the  cargo) 
begins  at  the  port  of  loading  and  runs  simultaneously 
with  the  insurance  on  the  cargo  so  laden,  that  is,  until 
actually  discharged  from  the  vessel. 

Charter  is  an  agreement  to  hire  the  vessel,  either  to 
load  at  the  port  where  she  is,  or  to  proceed  to  another  port 
to  take  in  a  cargo  for  the  ultimate  tlestination.  Insurance 
on  such  an  interest  covers  from  the  time  the  same  is  made 
binding,  even  though  the  vessel  has  to  proceed  to  another 
port  to  load  the  cargo,  and  terminates  upon  the  discharge 
of  the  cargo. 

Reference  has  been  made  to  profits  as  an  insurable 
interest.  This  may  occur  under  the  following  conditions: 
If  a  merchant  should  purchase  certain  articles  of  mer- 
chandise which  have  not  arrived  at  destination,  and  there 
be  an  advance  in  the  market  so  that  he  has  a  profit  in  the 
goods,  he  has  an  insurable  interest  in  such  profit,  and 
may  insure  it,  even  though  the  property  itself  was  originally 


MARINE  INSURANCE  POLICY  349 

insured  by  the  seller.  An  insurance  thus  made  would 
represent  an  insurable;  interest,  even  though  a  subsequent 
change  in  the  market  might  have  resulted  in  there  being 
no  profit  in  the  goods  on  their  arrival. 

We  will  now  refer  to  the  methods  of  settlement  of  losses. 
As  respects  total  losses,  the  method  is  simple.  It  requires 
the  ordinary  proof,  such,  for  example,  as  the  protest  of 
the  master.  Immediately  after  the  loss  of  the  ship,  it  is 
the  duty  of  the  master  to  repair  to  the  office  of  the  United 
States  consul,  if  at  a  foreign  port,  and  if  in  a  port  of  the 
United  States  to  a  notary  public,  and  he,  together  with  a 
part  of  his  crew,  sets  forth  the  circumstances  under  which 
the  vessel  was  lost,  and  protests  against  the  perils  which 
resulted  in  the  loss.  This  document  is  called  a  protest. 
The  circumstances,  as  recorded  in  the  log  book  of  the  ship, 
are  noted  in  the  protest  imder  oath  or  affirmation,  and  the 
consul  then  furnishes  the  master  with  an  authenticated 
copy.  This  is  termed  "proof  of  loss."  If  the  insurance 
be  on  the  ship,  the  proof  of  interest  would  consist  of  the 
register  of  the  vessel  recorded  in  the  custom  house,  nam- 
ing the  owner  and  the  extent  of  his  interest  in  the  ship. 
If  the  insurance  be  on  the  freight,  a  manifest  of  the  vessel, 
setting  forth  the  cargo  laden  and  the  freight  thereon,  or, 
if  a  charter,  the  charter  party,  giving  the  interest.  As 
respects  insurance  on  cargo,  to  distant  ports,  underwriters 
have,  as  a  rule,  representatives  at  most  of  the  maritime 
ports  of  the  world  whose  agency  is  called  into  requisition 
in  case  of  damage  to  cargo.  The  agent  agrees  on  a  com- 
promise, or,  if  that  cannot  be  reached,  a  sale  at  auction 
may  be  resorted  to.  The  agent  then  gives  the  consignee 
an  appraisement,  detailing  the  nature  of  the  settlement, 
with  a  certificate  of  the  market  value  of  the  goods.  If  the 
sale  at  auction  be  made,  the  sum  realized  on  the  goods, 
deducted  from  the  market  value,  represents  the  loss  sus- 
tained by  the  merchant.  The  percentage  of  loss  thus 
determined  is  applied  to  the  sum  insured.  An  example 
of  such  an  adjustment  is  herewith  presented: 


350  YALE  READINGS  IN  INSURANCE 

100  bbls.  flour,  insured  for  and  valued  at  $5.00  per  barrel     .  .  .  $500.00 


Flour  being  insured  subject  to  5  per  cent,  particular 

average,  necessary  for  a  claim,  $25.00 
Sound  value  at  port  of  destination,  $7.00  per  barrel  .  .  $700.00 
Being  damaged,  sold  for,  say,  $3.50  per  barrel 350.00 

Deterioration,  50  per  cent $350.00 

Insured  value,  $500.00,  at  50  per  cent,  loss $250.00 

Add  extra  charges: 

Auctioneer's  commission,  2^-  per  cent $8.75 

Surveyor's  fee     5.00 

Advertising    1.25      15.00 

Loss    $265.00 

It  will  thus  be  noticed  that  the  underwriter  pays  the 
percentage  of  loss  ascertained  as  above,  applied  to  the 
amount  on  which  he  has  received  premium,  and,  while 
the  percentage  is  ascertained  on  a  higher  basis  than  the 
sum  insured,  yet  it  must  be  borne  in  mind  that  freight 
has  been  paid  on  the  flour  from  the  port  of  importation, 
likewise  duties,  and  other  incidental  expenses,  in  placing 
the  goods  where  a  higher  market  of  necessity  prevailed. 

As  respects  particular  average  on  the  hulls  of  vessels: 
Should  an  insurance  be  made  of  $10,000  on  a  wooden  ship 
valued  at  $50,000,  the  vessel  being  what  is  termed,  "sub- 
ject to  5  per  cent,  particular  average,"  which  means  that 
the  underwriter  will  be  liable  for  loss  if  amounting  to  5 
per  cent,  on  the  entire  value  of  the  vessel,  that  percentage 
is  ascertained  after  deducting  one-third  new  for  old;  that 
is,  the  repairs  being  made  upon  the  vessel,  the  under- 
writer pays  only  two-thirds  of  the  cost,  and  the  adjustment 
would  be  as  follows: 


MARINE  INSURANCE  POLICY  351 

$10,000  insured,  valued  at  $50,000;  required,  necessary  for  a  claim, 
$2,500. 

Repairs  Particular        Net 

Average 

To  Hull    $3,000.00 

Rigging  and  sails    800.00 

Masts  and  spars    1,200.00 

$5,000.00 
Cr.  for  old  materials 500.00 

$4,500.00 
Off,  J  new  for  old       1,500.00 

$3,000.00 
Protest  and  surveys     50.00 

Particular  average    $3,050.00 

Policy  for  $10,000  as  above  will  pay,  $610. 

Ships  are  now  mostly  built  of  iron  or  steel,  and  when 
repairs  are  made  upon  vessels  so  constructed  no  deduction 
of  one-third  new  for  old  is  made  unless  the  vessel  be  very- 
old. 

In  most  of  the  American  policies  provision  is  made 
for  the  payment  of  loss  thirty  days  after  presentation 
of  proofs  of  loss.  Time  is  thus  given  to  the  under- 
writers to  have  an  opportunity  to  examine  the  papers 
and  make  the  necessary  adjustment  of  the  loss,  but,  as  a 
rule,  these  payments  are  made  much  sooner  than  the  time 
indicated.  Cases  are  not  infrequent  where  an  assured 
presents  his  papers,  and,  the  loss  being  a  simple  one,  as 
stated  in  case  of  a  total  loss,  in  the  course  of  two  or  three 
hours  the  adjustment  is  made  and  the  loss  paid  that  day. 


CHAPTER  XIX 

Steam  Boiler  Insurance  ^ 

That  there  is  a  legitimate  field  for  steam  boiler  insurance 
is  shown  by  the  statistics  of  steam  boiler  explosions  that 
have  been  kept  for  the  past  forty  years  by  the  Hartford 
Steam  Boiler  Inspection  and  Insurance  Company.  From 
these  it  appears  that  from  October  1,  1867,  to  December 
31,  1908,  there  were  no  less  than  10,051  such  explosions 
in  the  United  States  and  adjacent  parts  of  Canada  and 
Mexico,  resulting  in  the  deaths  of  10,884  persons,  and  in 
more  or  less  serious  injury  to  15,634  others.  No  data  as 
to  the  loss  of  property  caused  by  these  explosions  are 
available,  but  there  is  no  doubt  that  it  was  very  large 
indeed. 

Sir  William  Fairbairn,  in  1854,  founded  the  first  associa- 
tion for  the  systematic  inspection  and  general  supervision 
of  steam  boilers,  his  association  being  now  known  as  the 
Manchester  Steam  Users'  Association,  with  headquarters 
in  Manchester,  England.  The  Hartford  Steam  Boiler 
Inspection  and  Insurance  Company,  organized  in  1866, 
was  the  first  company  formed  in  the  United  States  for  a 
like  purpose,  though  it  differed  from  the  Manchester  asso- 
ciation from  the  start,  in  offering  a  large  indemnity,  in 
case  the  boilers  placed  under  its  care  should  explode. 
There  are  now  (1909)  some  thirteen  companies  doing  steam 
boiler  insurance  in  the  United  States,  though  the  Hart- 
ford Company  is  still  the  only  stock  company  that  con- 
fines its  activities  to  this  one  line  of  work  alone. 

»  By  A.  D.  Risteen,  of  the  Hartford  Steam  Boiler  Inspection  and 
Insurance  Company,  Hartford.  Reprinted  with  additions  from  pages 
250-271  of  the  "  Yale  Insurance  Lectures,  Fire  and  Miscellaneous." 

352 


STEAM  BOILER  INSURANCE  353 

In  boiler  insurance  the  fundamental  object  ought  to  be, 
to  prevent  explosions  so  far  as  possible.  The  life  insurance 
companies  cannot  guard  themselves  in  this  manner,  save 
in  the  most  general  way.  The  fire  companies  can  do  much 
more,  and  they  do  aim  to  prevent  fires  so  far  as  possible 
by  a  system  of  inspection  which  is  designed  to  detect  and 
remove  special  sources  of  danger.  The  boiler  insurance 
companies  can  go  even  further  in  this  direction,  however, 
and  experience  has  shown  that  it  is  possible,  by  thorough 
inspection,  to  prevent  explosions  in  a  very  large  measure. 
Prevention,  then,  is  the  key-note  of  successful  boiler  insur- 
ance ;  and  a  very  large  proportion  of  the  income  of  a  boiler 
insurance  company  is  expended  in  the  making  of  inspec- 
tions, and  in  other  similar  services  to  the  assured,  which 
tend  to  lessen  the  likelihood  of  an  explosion.  The  Hart- 
ford Company  maintains  a  chemical  laboratory,  for  ex- 
ample, in  which  troublesome  feed  waters  are  analyzed, 
and  appropriate  methods  discovered  for  the  treatment  of 
these  waters,  so  that  they  may  be  used  successfully  in  the 
boilers  in  which  they  have  been  found  to  give  trouble. 
It  also  maintains  a  department  of  design,  in  which  plans 
and  specifications  for  boilers  and  boiler  settings  are  pre- 
pared for  the  assured,  no  charge  being  made  for  these 
unless  the  labor  involved  is  considerable;  and  in  that  case 
the  charge  is  merely  nominal,  and  is  intended  simply  to 
cover  the  actual  expense  to  which  the  insurance  company 
is  put. 

I  imagine  that  you  will  want  to  know  something  about 
the  way  in  which  the  premiums  that  are  received  by 
the  boiler  insurance  companies  are  expended.  I  cannot 
answer  this  for  others,  but  so  far  as  the  Hartford  Company 
is  concerned,  it  may  be  said  that  the  premium  receipts 
are  divisible  into  a  maximum  portion  of  about  80  per  cent, 
of  the  whole,  and  two  minimum  portions  of  about  10  per 
cent.  each.  One  of  the  10  per  cent,  portions  stands  for 
the  profit  of  the  business,  and  the  other  represents  what 
may  be  regarded,   roughly,  as  the  amount  set  aside  to 


354  YALE  READINGS  IN  INSURANCE 

provide  for  the  payment  of  losses  due  to  explosions.  The 
80  per  cent,  portion  represents  what  is  expended  in  procur- 
ing the  risks,  and  in  inspecting  them  with  such  care  as  to 
keep  the  losses  within  the  10  per  cent,  limit.  Experience 
has  shown  that  it  is  good  business  policy  to  expend  a  very 
large  portion  of  the  total  premiums  in  the  making  of  inspec- 
tions, and  it  is  haidly  necessary  to  say  that  the  insurance 
company  is  also  under  moral  obligation  to  its  patrons  to 
maintain  an  inspection  service  of  the  highest  order  of 
excellence. 

The  general  method  of  conducting  the  business  of  boiler 
insurance  at  the  present  time  will  best  be  made  clear,  per- 
haps, by  tracing  the  steps  by  which  an  insurance  contract 
in  this  field  is  made  and  consummated. 

The  boiler  owner  being  assumed  to  be  persuaded  of  the 
wisdom  of  taking  out  a  policy,  the  next  questions  to  be 
determined  are  these:  (1)  The  term,  or  duration,  of  the 
policy.  (2)  The  amount  for  which  it  shall  be  written. 
(3)  The  premium  that  shall  be  paid. 

First,  as  to  the  term  of  the  policy.  This  happens  to  be  a 
very  simple  matter,  for  nearly  all  boiler  insurance  policies 
are  written  for  three  years,  and  it  is  only  under  exceptional 
circumstances  that  this  practice  is  modified.  I  may  as 
well  explain,  once  for  all,  that  what  I  shall  have  to  say 
relates  to  the  gi'eat  mass  of  the  business  of  the  company 
with  which  I  am  connected;  and  it  is  to  be  understood 
throughout  that  when  a  statement  is  made,  it  merely 
represents  this  general  practice.  Reasonable  persons  may 
nearly  always  be  expected  to  do  reasonable  things;  and 
boiler  insurance  companies  are  always  willing  to  take 
account  of  any  exceptional  conditions  that  a  given  case 
may  present,  and  to  modify  their  practice  accordingly; 
—  provided  the  proposed  modification  does  not  interfere 
with  the  desirability  of  the  risk.  The  general  rule  of  the 
business  is,  then,  to  write  policies  for  three  years. 

Second,  as  to  the  amount  for  which  the  policy  is  to  be 
WTitten.     This  problem  and  the  third  one,  —  namely,  the 


STEAM  BOILER  INSURANCE  355 

amount  of  the  premium,  —  are  intimately  connected. 
For  it  is  e\ddent  that  the  total  amount  of  the  premium 
must  be  sufficient  to  repay  the  insurance  company  for 
the  expenses  incurred  in  obtaining  the  risk,  and  for  those 
incurred  in  inspecting  the  boiler  periodically  while  it  is 
insured ;  and  there  must  also  be  an  excess,  over  and  above 
these  sums,  to  be  set  aside  for  the  payment  of  such  losses 
as  may  be  incurred  by  explosion.  In  the  early  days,  it 
was  customary  to  fix  the  rate  to  be  charged  by  means  of 
a  sort  of  sliding  scale,  the  rate  being  higher  for  high  pres- 
sures than  for  low  ones,  and  higher  for  boilers  that  had 
been  in  service  for  some  time  than  for  those  that  were 
just  out  of  the  maker's  shop.  At  the  present  time,  how- 
ever, it  is  not  the  practice  to  vary  the  rate  in  this  manner; 
and  the  great  bulk  of  the  business  is  now  written  at  a  uni- 
form rate  of  1  per  cent,  for  the  three  years,  provided  the 
face  of  the  policy  is  great  enough  for  this  rate  to  yield 
a  premium  sufficient  to  cover  the  three  items  just  noted;  — 
that  is,  the  expense  of  obtaining  the  risk,  of  inspecting  it 
periodically,  and  of  insuring  it.  It  is  not  profitable  to 
insure  isolated  boilers  at  this  rate  for  a  smaller  sum  than 
$5000  each ;  the  rate  of  1  per  cent,  for  three  years  yielding, 
in  this  case,  the  sum  of  S50  for  the  three  years,  or  an 
average  premium  of  $16.67  per  annum. 

In  large  plants,  where  there  are  many  boilers,  a  smaller 
sum  than  $5000  per  boiler  may  be  sufficient;  for  in  such 
plants  the  inspectors  can  usually  arrange  to  examine  several 
boilers  on  each  trip,  and  thus  reduce  the  expense  of  inspec- 
tion per  boiler.  A  battery  of  ten  boilers,  for  example, 
might  reasonable  be  insured  for  $40,000,  at  a  rate  of  1  per 
cent,  for  three  years;  this  yielding  a  total  premium  for 
the  three  years  of  $400,  which  is  at  the  rate  of  $133^  per 
annimi  for  the  t(;n  boilers.  The  business  should  be  good 
at  this  figure,  if  several  of  the  boilers  can  be  had  for  inspec- 
tion at  the  same  time,  and  if  the  plant  is  not  too  far  re- 
moved from  the  ordinary  routes  of  travel.  In  general, 
therefore,  the  face  of  the  policy  is  computed  by  allowing, 


356  YALE  READINGS  IN  INSURANCE 

for  each  boiler  in  the  plant,  something  like  $5000  if  the 
plant  is  a  small  one,  or  somewhat  less  than  this  if  it  is  a 
large  one ;  and  the  total  premium  to  be  paid  for  the  three 
years  that  the  policy  is  to  run  is  then  computed  by  taking 
1  per  cent,  of  the  face  of  the  policy  as  so  determined.  It 
will  be  readily  understood  that  when  the  risk  is  of  an 
unusual  character,  this  general  rule  has  to  be  modified 
accordingly.  For  example,  a  single  high-pressure  boiler, 
bursting  in  the  basement  of  a  factory  whose  product  or 
machinery  is  especially  valuable,  might  easily  do  far  more 
than  $5000  of  damage;  and  if  numerous  workmen  were 
employed  in  parts  of  the  building  near  to  the  boiler,  the 
likelihood  of  a  considerable  loss  of  life  and  personal  injury 
would  have  to  be  considered  specially.  The  face  of  the 
policy  would  then  naturally  be  increased,  so  as  to  take 
account  of  the  probable  gravity  of  the  results  of  an  explo- 
sion. The  rate  charged  for  the  insurance  would  not  ordi- 
narily be  raised  in  such  a  case,  however;  for  the  standard 
rate  of  1  per  cent,  for  three  years,  would  yield  a  larger 
gross  premium,  and  the  expenses  of  solicitation  and  inspec- 
tion being  fixed,  it  is  evident  that  that  part  of  the  pre- 
mium which  would  be  available  for  the  payment  of  losses 
would  be  proportionately  greater  with  the  large  premium 
than  with  the  smaller  one;  and  the  insurance  company 
therefore  has  a  larger  proportionate  sum  that  can  be  set 
aside  to  provide  for  the  increased  possibility  of  a  serious 
explosion. 

I  cannot  emphasize  too  strongly  the  fact  that  there  is 
710  rate  at  which  a  boiler  is  insurable,  when  there  is  any 
reason  to  doubt  its  safety.  In  fire  insurance  an  extra 
hazardous  risk  may  be  provided  for  by  an  increase  in  the 
rate  of  insurance;  but  in  boiler  insurance  this  practice  is 
not  followed.  It  is  considered  that  the  ordinary  hazards 
that  are  necessarily  attached  to  the  use  of  high  pressure 
steam  are  quite  great  enough;  and  a  boiler  that  is  not 
regarded  as  safe  for  the  pressure  to  be  carried,  is  not  con- 
sidered to  be  a  fit  subject  for  insurance  at  any  rate  whatso- 


STEAM  BOILER  INSURANCE  357 

ever.  Moreover,  I  may  add  that  experience  has  shown 
that  in  boiler  insurance  the  moral  hazard  is  negligible. 
Men  doubtless  burn  their  own  property  occasionally,  for 
the  purpose  of  recovering  the  insurance  upon  it;  but  it  is 
doubtful  if  they  ever  intentionally  cause  their  own  boilers 
to  explode. 

It  being  assumed,  now,  that  the  agent  and  the  boiler 
owner  have  agreed  upon  the  term  of  the  insurance,  and 
upon  the  sum  for  which  the  policy  is  to  be  written,  and 
upon  the  premium  that  is  to  be  paid,  the  next  step  is  to 
make  out  a  formal  application  for  the  insurance.  Suit- 
able blanks  are,  of  course,  provided  for  this  purpose,  and 
the  agent  fills  them  in  by  specifying  the  number,  type,  and 
location  of  the  boilers,  the  name  of  the  person  or  corpora- 
tion owning  them,  the  face  of  the  policy  desired,  the  term 
for  which  the  policy  is  to  run,  and  the  premium  that  is  to 
be  paid.  The  owner  then  signs  this  application,  and  his 
signature  completes  his  relations  with  the  agent. 

The  application,  thus  made  out,  is  then  forwarded  to  the 
home  office,  or  to  the  branch  office  to  which  the  agent  is 
accredited.  The  next  step  is  analogous  to  the  correspond- 
ing one  in  life  insurance.  In  life  insurance,  after  the  appli- 
cation is  made  out,  the  question  arises,  whether  or  not  the 
medical  examiner  will  accept  the  risk;  and  this  point  is 
determined  by  making  a  careful  physical  examination  of 
the  applicant.  So  in  boiler  insurance,  the  next  step  after 
the  delivery  of  the  application  is  for  the  insurance  com- 
pany to  send,  to  the  mill  or  factory,  one  of  its  experts  in 
steam  boiler  construction  and  management,  to  pronounce 
judgment  upon  the  condition  of  the  boilers,  and  to  give 
his  opinion  as  to  whether  they  are  or  are  not  in  insurable 
condition.  This  expert  is  technically  known  as  an  "in- 
spector." After  having  made  arrangements  with  the 
owner  to  have  the  boilers  cool  and  ready  for  examination, 
the  inspector  proceeds  to  the  plant  where  they  are  located, 
and  examines  them  with  great  care.  I  think  that  I  may 
safely  say,  that  his  examination  is  even  more  searching 


358  YALE  READINGS  IN   INSURANCE 

than  that  which  is  given  in  the  case  of  hfe  insurance. 
If  the  boilers  are  of  a  type  that  will  admit  of  it,  he  enters 
them,  crawling  all  about  them  internally,  and  noting  the 
dimensions  and  the  actual  present  condition  of  ever}^  essen- 
tial part.  He  also  makes  a  corresponding  examination  of 
the  external  surfaces,  recording  the  thickness  of  the  plates, 
the  pitch  of  the  rivets,  and  many  other  items  that  have  to 
do  with  the  strength  of  the  boiler,  and  its  ability  to  with- 
stand safely  the  working  pressure  that  the  owner  desires 
to  carry.  The  numerical  data  that  he  thus  obtains  are 
entered  in  blank  spaces  that  are  provided  upon  the  inner 
pages  of  the  same  application  that  the  owner  has  signed. 
To  give  some  idea  of  the  minuteness  of  his  examination, 
I  may  say  that  the  blanks  that  he  has  to  fill  out  contain 
forty-two  main  questions,  many  of  which  have  several  sub- 
questions  under  them,  so  that  in  all  he  has  to  answer 
perhaps  as  many  as  seventy-five  different  questions.  I 
cannot  give  the  exact  number,  because  it  natm'ally  varies 
a  little,  with  the  type  of  boiler.  Questions  relating  to 
water  tube-boilers,  for  example,  are  passed  over  when  the 
boilers  under  consideration  are  of  the  fu*e-tube  type. 

It  sometimes  happens  that  the  boilers  are  of  such  small 
size,  or  of  such  a  type,  that  they  cannot  be  actually  entered 
by  the  inspector.  In  cases  of  this  kind,  he  has  to  infer 
their  internal  condition  by  making  an  examination  through 
the  several  small  openings  that  should  always  be  pro- 
vided in  such  boilers,  and  which  are  technically  known  as 
''hand-holes."  In  such  cases  he  also  applies  a  "hydra- 
static  pressure"  to  the  boilers.  This  consists  in  filling 
thom  entirely  up  with  w^ater,  and  then  forcing  a  small 
additional  quantity  of  water  into  them  by  means  of  a 
pump.  By  this  means  a  considerable  stress  is  easily 
brought  upon  the  boilers,  and  when  they  are  thus  under 
pressure,  the  inspector  notes,  carefully,  whether  or  not 
they  show  signs  of  distress.  The  distress  may  make 
itself  manifest  by  leakage  from  the  joints  or  tube  ends,  or 
by  the  breakage  of  some  essential  part,  or  by  the  bulging, 


STEAM   BOILER  INSURANCE  359 

collapse  or  rupture  of  some  portion  of  the  boiler,  or  in 
other  ways  that  I  do  not  need  to  mention  specially. 

Having  made  a  thorough  examination,  the  inspector 
fills  out  the  blanks  provided  for  this  purpose  upon  the 
inner  pages  of  the  original  application,  and  then  transmits 
the  application  to  the  chief  inspector  of  the  office  from 
which  he  comes.  He  also  gives  his  judgment,  based  upon 
the  construction,  age,  and  condition  of  the  boilers,  and 
upon  his  previous  experience  with  boilers  of  the  same 
type,  as  to  the  working  pressure  that  the  boilers  can  safely 
withstand.  And,  finally,  he  submits  a  written  report  to 
his  office,  describing  in  detail  the  condition  in  which  he 
found  the  boilers;  a  copy  of  this  report  being  subsequently 
forwarded  to  the  boiler  owner.  It  often  happens  that  a 
thorough  inspection  of  this  sort  results  in  the  discovery 
of  some  defect  or  structural  weakness,  which  may  even  be 
imminently  dangerous,  and  which  had  not  been  previously 
suspected.  In  such  a  case  the  fact  is,  of  course,  imme- 
diately reported  to  the  boiler  owner,  and  definite  recom- 
mendations are  made  as  to  the  alterations  or  repairs  that 
are  required  in  order  to  put  the  boilers  into  safe  condition 
again.  The  owner  is  also  informed  that  the  negotiations 
can  proceed  no  further  until  the  suggested  alterations 
have  been  made,  and  the  inspector  has  subsequently  satis- 
fied himself  by  a  second  inspection,  not  only  that  thc^y 
have  been  made,  but  that  they  have  been  made  properly 
and  well. 

It  sometimes  happens,  too,  that  the  preliminaiy  inspec- 
tion discloses  the  fact  that  the  boiler  is  in  such  bad  shape 
that  it  would  be  impossible,  or  at  least  unprofitable,  to 
try  to  repair  it;  antl  in  this  event  the  inspector  condemns 
it;  —  or,  which  is  the  same  thing,  he  pronounces  it  unin- 
surable. I  should  like  to  state,  however,  that  wholesale 
condemnation  is  not  favored  by  the  boik^r  insui'ance  com- 
panies. They  would  indeed  like  to  insure  notlung  but 
ideally  perfect  boilers;  yet  in  condemning  boilers  that  are 
already  in  service,  the  inspector  is  expected  to  exercise 


360  YALE  READINGS  IN   INSURANCE 

his  best  judgment,  in  accordance  with  safe  rules,  for  the 
benefit  of  all  concerned; —  that  is,  on  behalf  of  the  in- 
sured, as  well  as  of  the  company  that  employs  him.  His 
judgment  is  a  disinterested  one,  so  far  as  he  is  concerned 
personally,  for  his  compensation  is  the  same  whether  he 
accepts  the  boiler  or  rejects  it.  His  company  will  not 
insure  a  boiler  that  is  believed  to  be  unsafe,  nor  does  the 
owner  desire  to  replace  a  boiler  that  is  really  safe  and 
satisfactory,  merely  because  the  inspector  would  like 
him  to  have  a  somewhat  better  one.  The  task  of  the 
inspector  who  condemns  a  boiler  is  therefore  seen  to  be  a 
delicate  one,  involving  a  number  of  important  considera- 
tions; and  he  is  required  to  give  his  superior  officers  in 
the  insurance  company  full  and  sufficient  reasons  for  his 
condemnation,  so  that  the  prospective  insurer  may  be 
really  satisfied,  in  his  own  mind,  that  the  condemnation 
is  justifiable  from  his  own  point  of  view,  as  well  as  from 
that  of  the  insurance  company.  I  may  say  that  in  our 
own  practice  we  rarely  find  the  boiler  owner  dissatisfied 
with  the  reasons  for  condemnation  that  are  furnished  to 
him.  We  cannot  force  him  to  replace  a  defective  boiler 
with  a  new  one;  but  we  almost  invariably  find  him  ready 
to  give  proper  attention  to  our  criticism;  and  when  he 
really  ought  to  have  a  new  boiler,  it  is  seldom  difficult  to 
convince  him  of  that  fact. 

Assuming,  now,  that  the  inspector  has  satisfied  himself 
that  the  boilers  upon  which  insurance  is  desired  are  really 
in  good  condition,  the  next  step  is  the  review  of  the  opinion 
of  the  inspector  by  the  chief  inspector  of  his  department. 
This  corresponds  to  the  medical  director's  review,  in  life 
insurance,  of  the  opinion  given  by  the  examining  physician. 
The  chief  inspector  takes  in  hand  the  various  measurements 
and  other  data  obtained  by  the  inspector's  examination, 
and  by  the  aid  of  them  he  carefully  computes  the  safe 
working  pressure  that  his  company  would  be  willing  to 
allow  the  boiler  to  carry.  Usually  the  estimate  so  ob- 
tained will  be  found  to  agree  satisfactorily  with  that  given 


STEAM  BOILER  INSURANCE  361 

by  the  inspector;  but  it  sometimes  happens  that  this 
careful  calculation  reveals  a  source  of  weakness  at  some 
point,  whose  importance  the  practical  eye  of  the  inspector 
did  not  perceive ;  and  in  such  a  case  the  owner  of  the  boiler 
is  notified  of  the  finding,  and  he  must  see  that  the  error 
of  construction  is  remedied  before  the  insurance  company 
will  take  any  further  steps  towards  the  issuance  of  his 
pohcy. 

If  the  inspector  and  the  chief  inspector  are  both  satis- 
fied of  the  safety  of  the  boiler  at  the  time  that  it  is  offered 
for  insurance,  the  policy  is  issued  to  the  owner,  who  is 
thereafter  protected,  up  to  an  amoimt  equal  to  the  face  of 
the  policy,  against  loss  of  property  from  the  explosion, 
rupture,  or  collapse  of  his  boiler  or  of  any  part  of  it, 
owing  to  the  pressure  of  steam.  He  is  also  protected 
(always  within  the  amount  for  which  the  policy  is  written) 
for  any  loss  or  damage  to  which  he  may  be  subjected, 
from  the  same  cause,  by  reason  of  the  destruction  of  his 
neighbors'  property,  or  by  reason  of  loss  of  life  or  of  per- 
sonal injuries  to  any  persons  whatever.  The  damages 
from  loss  of  Hfe,  or  from  personal  injuries,  are  determined, 
in  this  line  of  insurance  as  well  as  in  other  lines,  by  the 
earning  capacity  of  the  victims;  and  also,  in  the  case  of 
personal  injuries,  by  the  time  during  which  the  unfor- 
tunate ones  are  incapacitated.  It  is  usual  to  specify 
in  the  policy,  however,  that  the  liability  of  the  insurance 
company  shall  not  exceed  $5000  in  the  case  of  any  one 
death. 

After  the  issuance  of  the  policy,  the  insurance  company, 
primarily  for  its  own  protection,  but  also  incidentally  in 
the  interest  of  the  assured,  regularly  makes  a  certain  num- 
ber of  inspections  of  each  boiler,  per  annum  (usually  four) ; 
and  it  reserves  the  right  of  access,  at  any  time,  to  the 
boilers  that  are  insured,  and  to  any  and  all  machinery 
that  may  be  concerned  in  the  safe  operation  of  the  boilers. 
Of  the  four  inspections  that  are  made  per  annum,  at  least 
one  is  a  complete  internal  and  external  inspection,  sim- 


362  YALE  READINGS  IN  INSURANCE 

ilar  to  that  which  is  given  at  the  outset,  except  that  it  is 
not  necessary  to  repeat  the  measurements,  these  being 
made  once  for  all  The  inspector  making  these  complete 
inspections  prepares  a  detailed  written  report  in  each 
case,  stating  in  full  the  condition  in  which  the  boilers 
were  found ;  and  a  copy  of  every  such  report  is  transmitted 
to  the  owner  of  the  boilers. 

In  these  routine  inspections,  it  often  happens  that  the 
inspector  finds  that  defects  or  weaknesses  have  developed, 
in  the  course  of  the  service  of  the  boilers;  for  boilers,  like 
all  other  structures  that  are  put  to  constant  use  under 
trying  conditions,  wear  out,  and  develop  troubles  of  vari- 
ous kinds.  In  fact,  the  number  of  different  ways  in  which 
steam  boilers  can  go  WTong  would  surprise  any  person  not 
familiar  with  the  general  facts  of  the  case.  Many  of  the 
defects  that  are  discovered  in  this  way,  and  pointed  out 
to  the  owners,  are  of  such  a  nature  that  they  would  be 
overlooked  by  the  regular  attendant.  For  the  regular 
attendant,  even  although  he  has  been  in  charge  of  boilers 
for  many  years,  and  may  be  an  unusually  competent 
engineer  or  fireman,  has  at  most  seen  but  few  boilers,  and 
so  far  as  his  actual  experience  goes,  he  cannot  be  expected 
to  be  familiar  with  many  diffei'ent  kinds  of  defects.  The 
inspector  of  the  insurance  company,  on  the  other  hand, 
has  seen  himdreds  and  perhaps  thousands  of  boilers,  and 
has  watched  many  of  them  from  year  to  year,  imder  the 
most  varying  conditions;  and  his  training  has  fitted  him 
to  detect  and  forsee  intelligently  the  consequences  of  defects 
whose  importance  the  man  in  immediate  charge  of  the 
boilers  would  probably  never  adequately  appreciate. 

Defects  that  develop  in  use,  and  which  are  detected  in 
the  course  of  the  regular  periodical  inspections,  are  pointed 
out  to  the  owner  of  the  boilers  in  the  written  reports  that 
are  submitted  to  him.  If  they  are  considered  trivial, 
that  fact  is  indicated,  and  he  is  requested  to  bear  them  in 
mind,  so  that  any  tendency  that  they  may  manifest  towards 
increase  may  be  promptly  noted.     If  they  are  considered 


STEAM  BOILER  INSURANCE  363 

to  be  bordering  upon  danger,  his  attention  is  similarly 
directed  to  them,  and  he  is  requested  to  have  the  neces- 
sary repairs  made  at  his  earliest  convenience ;  the  fact  that 
they  have  been  properly  made  being  subsequently  veri- 
fied by  the  inspector  in  person.  If  they  are  still  more 
serious,  and  are  considered  by  the  inspector  to  be  immedi- 
ately dangerous,  the  owner  is  notified  of  this  fact  also, 
and  he  is  warned  not  to  put  the  boiler  into  service  again 
until  it  has  been  made  safe.  Of  course,  the  insiu-ance 
company  has  no  way  in  which  to  enforce  its  recommenda- 
tions; but  if  compliance  with  them  is  refused,  the  company 
reserves  the  right  to  cancel  the  insurance  at  once,  and 
few  owners  care  to  incur  this  penalty.  For  it  is  univer- 
sally admitted  that  the  inspectors  are,  as  a  class,  men  of 
wide  experience  and  good  judgment;  and  if  an  explosion 
should  occur  after  the  owner  has  refused  to  comply  with 
their  suggestions,  and  has  had.  his  policy  canceled  in 
consequence,  he  will  lose  not  only  the  insurance,  but  he 
will  also  be  liable  to  be  subject  to  heavy  suits  for  damages, 
on  the  ground  of  culpable  negligence  in  refusing  to  act 
upon  the  advice  that  the  inspector  gave  him,  before  the 
accident. 

Wlien  policies  are  discontinued  in  this  manner,  it  is 
customary  for  the  insurance  company  to  return  to  the 
assured  a  certain  fraction  of  the  total  premium  that  has 
been  paid.  The  amount  so  returned  is  fixed  by  deducting 
from  the  premium  a  sum  sufficient  to  compensate  the  com- 
pany for  the  actual  expense  to  which  it  has  been  put,  and 
then  returning  a  pro  rata  fraction  of  the  balance.  That 
is,  of  the  balance  remaining  after  deducting  expenses, 
the  assured  receives  an  amount  which  stands  to  the  whole 
balance  in  the  same  proportion  that  the  unexpired  part 
of  the  term  of  the  policy  bears  to  the  whole  term. 

In  order  that  you  may  have  some  idea  of  the  scale  upon 
which  boiler  inspections  are  now  made,  I  may  say  that  in 
the  year  1908  the  Hartford  Com})any  (which  constantly 
employs  more  than  200  inspectors)  made  124,990  complete 


364  YALE  READINGS  IN  INSURANCE 

internal  and  external  inspections  of  steam  boilers,  and 
detected  151,359  defects,  of  which  15,878  were  considered 
to  be  dangerous.  In  the  same  year  it  condemned  no  less 
than  572  boilers  as  unsafe  for  further  use,  good  and  suffi- 
cient reasons  for  such  condemnation  being  given  in  every 
case.  From  the  beginning  of  its  business  down  to  Janu- 
ary 1,  1909,  it  had  shnilarly  condemned  19,700  boilers, 
and  when  it  is  remembered  that  in  most  of  these  cases 
the  owners  had  no  idea  of  the  danger  of  their  boilers  until 
the  inspector  had  visited  them,  you  will  see  that  there  is 
some  substantial  ground  for  our  claim  that  boiler  insurance 
is  (or  should  be)  very  largely  preventive. 

I  have  said  that  it  is  customary  to  make  at  least  four 
inspections  of  each  insured  boiler  per  annum,  and  I  have 
also  said  that  at  least  one  of  these  is  a  complete  internal 
and  external  inspection,  of  which  the  owner  is  notified  in 
advance,  and  for  which  he  has  his  boilers  cooled  and 
emptied  and  otherwise  prepared.  The  remaining  inspec- 
tions are  technically  known  as  "externals,"  since  they  are 
made  while  the  boiler  is  in  service,  and  must  therefore  be 
confined  to  the  examination  of  such  conditions  as  can  be 
observed  or  inferred  without  entering  the  boilers.  No 
notification  is  given  in  advance  of  these  visits,  and  conse- 
quently no  preparation  is  made  for  them.  The  intention 
is  that  the  inspector  shall  have  the  opportunity  of  viewing 
the  plant  when  his  coming  was  not  expected,  so  that  he 
may  see  it  under  the  ordinary  running  conditions.  He 
examines  the  safety  valve  to  assure  himself  that  it  is 
working  freely,  notes  the  pressure  that  is  being  carried 
and  compares  it  with  the  limit  that  the  policy  fixes,  ob- 
serves the  height  of  the  water  in  the  boiler,  and  tries  the 
gauge  cocks  to  see  if  they  and  the  water  glass  are  free. 
In  short,  he  looks  about  him  generally,  to  make  sure  that 
the  boilers  are  in  safe  hands,  and  that  they  are  being 
cared  for  properly. 

To  illustrate  the  importance  of  these  "external"  inspec- 
tions, let  me  cite  one  instance  that  came  under  my  notice. 


STEAM  BOILER  INSURANCE  365 

One  of  our  inspectors  from  the  Hartford  office  visited  a 
cotton-mill  in  Massachusetts  for  the  purpose  of  making  an 
"external"  examination  under  ordinary  running  condi- 
tions, and  found  that  nobody  was  present.  The  attend- 
ant had  doubtless  been  there  within  a  short  time,  but  he 
had  vacated  the  premises  for  some  purpose. 

The  inspector  had  hardly  entered  the  room  when  his 
experienced  ear  detected  a  noise  of  escaping  steam,  which 
he  felt  assured  was  not  due  to  any  ordinary  leakage  about 
a  pipe  joint.  Passing  to  the  rear  end  of  one  of  the  boilers, 
he  opened  a  door  in  the  brick  setting,  and  speedily  satis- 
fied himself  that  serious  trouble  was  imminent.  In  an 
emergency  of  this  kind,  the  first  thing  to  do  is  to  draw 
the  fire  from  under  the  boiler,  and  (when  there  are  several 
boilers  running  together)  shut  the  valve  in  the  steam 
pipe  that  connects  this  boiler  to  its  neighbors.  By  this 
means  the  pressure  in  the  suspected  boiler  is  caused  to  fall 
gradually,  so  that  the  boiler  becomes  every  moment  safer. 
The  inspector  was  just  finishing  this  operation  when  the 
attendant  returned  and,  not  knowing  who  he  was,  chal- 
lenged him  for  interfering  with  the  plant.  Explanations 
followed,  and  when  the  boiler  had  cooled  sufficiently  to 
permit  of  examination,  it  was  found  that  the  brick  arch 
over  the  rear  end  of  the  furnace  had  fallen  down,  allow- 
ing the  incandescent  products  of  combustion  to  strike 
directly  against  the  upper  part  of  the  rear  head;  and  this, 
being  unprotected  by  water,  had  become  overheated  to 
such  a  degree  that  the  back  head  had  bulged  out,  and  the 
brace  rivets  had  drawn  through  their  holes,  permitting 
the  steam  in  the  boiler  to  escape  and  make  the  sound 
which  had  first  attracted  the  inspector's  attention.  I  do 
not  know  how  many  of  you  will  find  this  technical  descrip- 
tion iiitelfigible;  but  permit  me  to  say  that  the  accident 
was  of  a  very  serious  kind,  and  that  it  is  probable*  that  in 
a  few  minutes  more  the  entire  back  head  of  the  boiler 
would  have  blown  out,  with  a  consequent  sudden  libera- 
tion of  energy  sufficient  to  destroy  the  boiler  house,  and 


366  YALE  READINGS  IN  INSURANCE 

perhaps   a   considerable   part   of  the   main   mill   adjoin- 
ing it. 

In  conclusion,  let  me  state  the  methods  that  are  followed 
in  the  settlement  of  losses  when,  in  spite  of  the  care 
taken  by  the  inspectors,  a  boiler  explodes  and  entails 
loss  of  property,  and  probably  also  loss  of  life  and  injury 
to  person,  the  assured  is  supposed  to  notify  the  insurance 
company  of  the  loss  as  promptly  as  possible.  The  insur- 
ance company  then  sends  its  adjuster  to  the  scene  of  the 
explosion,  and  he  performs  two  duties.  One  of  these 
consists  in  looking  over  the  ruins  in  the  interest  of  the 
insurance  company,  so  as  to  learn  the  cause  of  the  explo- 
sion, so  far  as  possible.  The  information  obtained  in 
this  w'ay  has  been  found  to  be  very  serviceable  in  the  pre- 
vention of  other  explosions  from  similar  causes;  so  that  in 
this  w^ay  all  the  patrons  of  the  insurance  company  derive 
an  indirect  benefit  from  every  explosion  upon  which  the 
insurance  company  loses.  The  adjuster  also  looks  over 
the  damaged  property  in  company  with  some  representa- 
tive of  the  owner,  and  together  they  attempt  to  reach  a 
fair  estimate  of  the  amount  of  the  loss.  It  usually  hap- 
pens that  an  agreement  of  this  sort  can  be  reached  with- 
out trouble;  but  in  case  of  an  irreconcilable  difference  of 
opinion,  some  third  and  presumably  disinterested  person 
is  agreed  upon  as  an  arbitrator.  The  loss  or  damage  to 
which  the  assured  has  been  subjected  being  determined, 
the  insurance  company  forwards  its  draft  in  settlement  at 
the  earliest  date  possible,  in  order  that  the  assured  may 
not  be  embarrassed  any  more  than  necessary  in  the  repair- 
ing of  the  damage  to  his  plant.  The  compensation  to  be  • 
awarded  by  the  assured  to  the  injured  and  to  the  legal 
representatives  of  the  killed  are  determined  in  a  similar 
manner,  and  the  award  agreed  upon  is  included,  of  course, 
in  the  draft  that  is  forwarded  to  the  insured. 

The  usefulness  of  the  boiler  insurance  company  should 
not  cease  with  the  payment  of  the  loss;  because  the  rep- 
resentatives of  the  insurance  company  have  seen  so  many 


STEAM  BOILER  INSURANCE  367 

cases  of  destruction  from  boiler  explosions  that  they  are 
usually  capable  of  giving  valuable  advice  as  to  the  best 
methods  of  clearing  away  the  wreckage,  and  of  restoring 
the  plant  to  its  original  condition  of  efficiency.  Services 
of  this  kind  are  freely  rendered,  and  no  charge  is  made 
for  them;  for  it  is  understood,  throughout  the  relations 
of  the  insurance  company  and  the  assured,  that  the  inter- 
ests of  the  assured  are  to  be  safeguarded  and  promoted  in 
every  way  possible. 

You  will  see,  from  what  has  been  said,  that  boiler  insur- 
ance differs  in  many  respects  from  insurance  of  other 
kinds.  It  does  not  involve  statistical  studies  to  any  con- 
siderable extent,  and  the  problems  that  arise  in  it  are 
mainly  those  relating  to  constructive  engineering,  and  to 
the  practical  management  of  boilers,  and  to  the  detection 
of  such  defects  as  the  boilers  may  develop  in  the  course 
of  their  operation. 

Every  boiler  owner  will  naturally  ask  himself,  before 
he  takes  out  insurance,  whether  the  chance  that  a  given 
boiler  will  explode  is  great  enougli  to  warrant  him  in  pay- 
ing the  premium  that  is  asked  by  the  company  that 
proposes  to  insure  it.  Most  of  the  boiler  owners  of  the  coun- 
try have  already  answered  this  in  the  affirmative,  as  is 
shown  by  the  fact  that  they  have  accepted  the  insurance. 
It  is  helpful,  however,  to  look  at  the  matter  from  the  fol- 
lowing point  of  view.  I  have  told  you  that  experience 
shows  that  a  rate  of  1  per  cent,  for  three  years  is  sufficient 
to  enable  the  insurance  company  to  carry  on  its  business 
soundly  and  with  profit.  This  corresponds  to  an  annual 
charge  of  one  three-hundredth  part  of  the  face  of  the  policy. 
Hence  if  the  face  of  the  policy  fairly  represents  the  dam- 
age that  an  explosion  would  be  likely  to  cause  (including 
death  claims  and  claims  for  personal  injuries),  it  is  plain 
that  the  insurance  company's  rate  is  equivalent,  from  the 
standpoint  of  the  theory  of  pi'obabilities,  to  an  even  bet 
that  an  insured  boiler,  when  inspected  and  cared  for  as 
the   insurance  company  actually  does  inspect  and   care 


368  YALE  READINGS  IN  INSURANCE 

for  it,  would  not  blow  up  in  three  hundred  years,  if  the 
natural  and  inevitable  deterioration  of  the  boiler  through 
use  would  permit  of  its  being  kept  in  service  for  that  length 
of  time.  I  think  I  need  hardly  say  that  a  rate  which  is 
based  upon  a  probability  of  this  sort  cannot  be  considered 
to  be  in  the  least  degree  exorbitant.  An  even  bet  that  a 
given  boiler  would  not  explode  if  run  continuously  from 
the  death  of  Queen  Elizabeth  down  to  the  present  day, 
under  the  stated  conditions,  appears  to  be  quite  a  reason- 
able one  from  the  standpoint  of  the  owner;  and  in  addi- 
tion it  should  be  remembered  that  he  has  the  advantage 
of  expert  inspections  during  this  whole  period,  these  alone 
being  worth  more  than  the  entire  sum  that  he  pays,  be- 
cause they  tend  to  lessen  his  repair  bills,  and  to  increase 
the  efficiency  of  his  boilers. 


CHAPTER  XX 

employers'  liability  insurance* 

It  is  perhaps  pertinent  to  a  discussion  of  this  subject  to 
trace  the  cause  for  the  estabUshment  of  this  form  of  insur- 
ance. The  necessity  for  such  insurance  has  for  its  founda- 
tion the  burdens  imposed  upon  employers  by  the  workings 
of  that  branch  of  the  law  relating  to  negligence,  so-called. 
Negligence  law,  however,  existed  in  some  form  as  far 
back  as  there  is  any  definite  record,  no  one  having  yet  been 
able  to  determine  clearly  just  when  and  where  it  com- 
menced. Employers'  liability  insurance,  on  the  other 
hand,  is  a  comparatively  new  institution,  its  introduction 
in  the  United  States  dating  back  to  less  than  twelve  years 
ago,  although  it  had  been  in  operation  in  Europe  for  a 
short  period  prior  to  that  time. 

It  may  be  well,  therefore,  to  trace  in  outline  what  is 
very  aptly  termed  the  "evolution  of  negligence  law"  down 
to  the  time  when  the  employers'  liability  insurance  was 
adopted  as  a  means  of  protection  against  its  application. 

In  early  times  there  were  no  such  fine  distinctions  as 
respects  negligence  as  exist  to-day.  Suits  for  damages 
were  rare  and  the  plaintiff  was  usually  obliged  to  prove 
the  damage  to  have  been  the  result  of  wilful  act. 

But  while  employers'  liability  insurance  is  distinctly 
a  modern  need,  due  to  the  great  growth  of  negligence 
actions  in  the  past  twenty  years,  the  law  of  negligence 
has  been  at  least  three  centuries  in  building.     Its  begin- 

'  By  W.  F.  Moore,  President  of  the  New  Amsterdam  Casualty  Com- 
pany of  New  York.  Reprinted  from  pages  929-971  of  "Insurance,  a 
Text-Book." 

369 


370  YALE  READINGS  IN  INSURANCE 

ning  is  lost  in  the  obscurity  of  feudalism,  in  which  the 
master,  as  the  owner,  virtually,  of  the  body  of  his  servant, 
answered  upon  the  field  of  arms  to  those  outside  his  house- 
hold who  were  injured  by  the  wrong  of  his  servants  or 
henchmen.  Under  the  feudal  regime  there  was,  of  course, 
no  recognition  of  any  right  of  the  servant  against  the 
master  for  the  latter's  negligence.  A  feudal  master  in 
his  own  household,  like  a  king,  could  do  no  wrong. 

The  statute  of  Westminster  II  (1295  a.d.),  allowing 
the  chancellor  to  grant  a  new  form  of  action  for  injury  to 
person  or  property,  marks  perhaps  the  first  recorded 
recognition  of  a  legal  remedy  for  negligence.  In  the 
reign  of  the  Plantagenet  kings  the  year-books  record  no 
cases  of  this  character.  In  Comyn's  Report  (1695-1740) 
is  found  the  first  collection  of  negligence  cases. 

Blackstone,  whose  now  classic  "Commentaries"  afford 
us  the  earliest  authoritative  exposition  of  English  law  in 
its  formative  stages,  refers  only  briefly  to  the  master's 
liability  to  third  persons  for  his  servant's  negligence  and 
does  not  even  mention  the  idea  of  a  master  bemg  liable 
to  his  employee  for  his  own  negligence. 

Blackstone  says:  "If  a  servant  by  his  negligence  does 
any  damage  to  a  stranger,  the  master  shall  answer  for  his 
neglect;  if  a  smith's  servant  lames  a  horse  while  he  is 
shoeing  him,  an  action  lies  against  the  master  and  not 
against  the  servant,  but  in  these  cases  the  damage  must 
be  done  while  he  is  actually  employed  in  the  master's 
service,  otherwise  the  servant  shall  answer  for  his  own 
misbehavior.  Upon  this  principle,  by  the  common  law, 
if  a  servant  kept  his  master's  fire  negligently  so  that  his 
neighbor's  house  was  burned  down  thereby,  an  action 
lay  against  the  master." 

How  great  the  contrast  between  the  servant's  position 
in  that  day  and  in  this  is  emphasized  by  the  further  state- 
ment of  the  same  author,  that  if  a  fire  occurs  in  the  mas- 
ter's house  through  the  negligence  of  any  servant,  such 
servant  shall  forfeit  one  hundred  pounds  to  be  distributed 


EMPLOYERS'  LIABILITY   INSURANCE  371 

among  the  sufferers,  and  in  default  of  payment  shall  be 
committed  to  some  workhouse  and  kept  to  hard  labor  for 
eighteen  months. 

Somewhat  later  we  find  the  earliest  recorded  attempt 
by  an  English  judge  to  formulate  the  law  of  negligence. 
After  an  exhaustive  analysis  of  the  Roman  law,  Lord  Holt 
in  the  celebrated  case  of  Coggs  v.  Barnard  (2  Lord  Ray- 
mond, 909),  in  the  year  1704  defined  three  degrees  of 
negligence,  viz.,  gross,  ordinary,  and  slight,  varying  in 
proportion  to  the  degree  of  care  assumed  by  the  person 
with  negligence  in  the  act  or  occupation  involved. 

The  gi'owth  of  that  spirit  of  individual  responsibility 
which  characterizes  and  animates  all  Anglo-Saxon  juris- 
prudence soon  led  the  English  judges  to  lay  down  one 
broad  rule  of  duty  which  has  since  been  the  basis  of  the 
law  of  negligence,  and  which,  after  many  modifications, 
is  crystallized  in  a  modern  definition  as  follows:  "Negli- 
gence, constituting  a  cause  of  civil  action,  is  such  an  omis- 
sion, by  a  responsible  person,  to  use  that  degree  of  care, 
diligence  and  skill  which  it  was  his  legal  duty  to  use  for 
the  protection  of  another  person  from  injury  as,  in  a  nat- 
ural and  continuous  sequence,  causes  unintended  damage 
to  the  latter." 

The  early  cases  recognized  the  liability  of  the  master 
only  to  the  public  or  to  third  persons.  The  great  mass  of 
law  from  which  has  been  evolved  the  employer's  liability 
to  his  own  servants  for  his  negligence  or  for  the  negligence 
of  one  representing  him  in  the  pursuance  of  the  employer's 
duty  is  the  product  of  the  present  century.  The  master's 
duty,  so  elaborately  presented  in  the  employers'  liability 
acts  of  four  of  our  states  and  in  many  state  constitutions, 
with  its  intricate  modifications,  is  the  product  of  the  pres- 
ent generation. 

It  is  a  striking  fact  that  moi-e  suits  for  negligxuice  have 
been  tried  in  the  supreme  com-t  of  New  York  in  the  last 
ten  years  than  in  all  the  previous  experience  in  that  tri- 
bunal. 


372  YALE  READINGS  IN  INSURANCE 

Following  Old  World  history,  therefore,  we  may  look 
upon  the  evolution  of  the  law  of  the  master's  or  employer's 
liability  as  an  ever-growing  tendency  of  the  times,  due, 
doubtless,  in  large  measure,  to  the  changes  in  the  social 
and  industrial  condition  of  the  working  classes  as  well  as 
their  greater  demands  and  their  increased  political  im- 
portance. 

The  changes  in  law  thus  far,  however,  have  been  grad- 
ual. New  rules  and  tests  have  been  from  time  to  time 
adopted  until  the  conditions  reached  a  point  where  the 
responsibilities  of  the  employer  became  so  burdensome 
that  he  was  obliged  to  look  about  him  for  some  means  of 
protection  in  addition  to  the  exercise  of  ordinary  care  and 
foresight  in  the  actual  conduct  of  his  work.  The  employer 
with  a  limited  amount  of  capital  was  in  constant  danger 
of  disaster  to  his  business  by  reason  of  exorbitant  verdicts 
obtained  because  of  some  technical  negligence  for  which 
he  might  not  be  actually  and  morally  responsible,  but  for 
which  the  law  might  construe  the  liability  against  him. 

This  contingency  seemed  to  be  a  proper  subject  for 
insurance,  and  without  going  into  the  details  of  the  specific 
Parliamentary  acts  which  finally  caused  the  organization 
of  companies  for  the  issuing  of  policies  of  insurance  pro- 
viding indemnity  for  loss  by  reason  of  the  legal  liability 
of  the  employer,  it  has  perhaps  been  pointed  out  with 
more  or  less  clearness  that,  while  there  was  no  recognized 
necessity  for  such  insui-ance  in  early  times,  the  evolution 
of  the  law  of  negligence  brought  about  a  demand  which 
was  finally  met  by  employers'  liability  insurance. 

But  let  us  not  lose  sight  of  the  fact  that  while  this 
demand  was  met  when  the  want  was  most  felt,  the  intro- 
duction of  insurance  as  a  protection  has  by  no  means 
stopped  the  march  of  progress  in  negligence  law. 

The  premium  rates  originally  charged  are  found  now  in 
many  cases  to  be  totally  inadequate,  not  in  every  case 
because  of  faulty  judgment  in  the  beginning,  but  because 
the  cost  to  the  insurance  company  has  been  vastly  increased 


EMPLOYERS'  LIABILITY  INSURANCE  373 

by  a  continued  disposition  on  the  part  of  courts  and  legis- 
latures to  draw  the  lines  closer  and  place  greater  burdens 
on  the  employer,  which  burdens,  by  reason  of  insurance, 
fall  upon  the  companies. 

As  an  indication  of  the  trend  of  public  opinion  in  the 
direction  of  ''reform"  in  the  relationship  between  employer 
and  employed,  the  following  quotation  is  made  from  a 
volume  entitled  ''Workingmen's  Insurance"  recently  pub- 
lished by  Mr.  William  Franklin  Willoughby,  of  the  United 
States  Department  of  Labor : 

"Step  by  step  we  have  seen  almost  all  of  the  European 
nations  abandon  the  position  that  employees  have  no  claim 
for  damages  except  when  they  can  prove  negligence  on 
the  part  of  their  employers,  in  favor  of  the  one  where 
their  compensation  by  the  employers  should  be  compul- 
sory in  all  cases  except  where  they  are  wilfully  and 
seriously  at  fault.  The  indemnification  of  injured  working- 
men  has  thus  been  made  one  of  the  normal  items  in  the 
cost  of  operation,  to  be  taken  account  of  as  any  other 
charge.  At  the  same  time,  the  efforts  to  enforce  this 
system  through  the  law  courts  has  been  abandoned,  and 
the  position  taken  that  adequate  and  prompt  compensa- 
tion can  only  be  secured  where  the  amount  of  the 
compensation  is  determined  in  advance  by  a  fixed  scale  of 
indemnities.  It  is  only  as  thus  organized,  moreover, 
that  employers  are  able  to  take  account  of  the  risks  that 
they  run  and  provide  against  them  by  means  of  insurance. 

"Wliile  this  movement  has  been  going  on  in  Europe, 
the  United  States  has  stood  practically  still.  Scarcely  a 
beginning  has  been  made  toward  modifying  the  unjust 
provisions  of  the  old  common  law.  It  is  quite  beyond 
our  field  to  attempt  any  description  of  the  state  of  the 
law  regarding  employers'  liability  in  the  United  States 
at  the  present  time.  The  subject  is  one  of  great  complex- 
ity, and  here  we  are  concerned  with  the  principle  rather 
than  the  details  of  legislation.  It  is  sufficient  to  say 
that  the  United  States  is  in  the  position  where  the  injus- 


374  YALE  READINGS  IN   INSURANCE 

tice  of  the  common  law  in  this  respect  to  this  question  is 
more  or  less  recognized,  and  attempts  are  being  made  to 
bring  about  a  reform  through  legislation  and  judicial 
decisions.  The  states  are  thus  still  in  that  primitive  stage 
where  a  solution  is  sought  in  the  timid  modification  of  the 
doctrine  of  common  employment,  of  what  constitutes 
negligence,  and  other  subtilitios  of  the  law.  They  are 
thus  attempting  a  method  of  reform  long  since  abandoned 
by  European  nations  as  one  which  not  only  does  not  do 
justice  to  the  workingman,  but  is  thoroughly  inadequate 
to  solve  the  difficulties  of  the  question.  It  would  be  diffi- 
cult to  think  of  another  field  of  social  or  legal  reform  in 
which  the  United  States  is  so  far  behind  other  nations. 

''The  most  depressing  feature  of  the  situation  lies  in 
the  fact  that  the  very  principles  involved  in  this  gradual 
evolution  —  from  the  limited  liability  of  employers  to 
that  of  the  compulsory  indemnification  by  them  of  prac- 
tically all  injured  employees  —  are  as  yet  not  even  compre- 
hended in  the  United  States.  Evidently  it  is  useless  to 
expect  any  decided  legislation  until  the  people  generally 
are  made  to  see  the  justness  and  correctness  of  the  posi- 
tion for  which  we  are  contending  and  w^hich  has  so  recently 
been  assumed  by  Great  Britain.  The  first  step,  there- 
fore, consists  in  the  education  of  public  opinion.  This 
once  accomplished,  legislation  will  inevitably  follow." 

Mr.  Willoughby  writes  from  the  standpoint  of  the  phi- 
lanthropist, having  in  mind  only  the  protection  of  the 
workingman  and  his  family  against  want  and  suffering 
occasioned  by  loss  of  w^ork  or  support;  but  there  is  a  close 
relationship  between  the  movement  for  bettering  the 
condition  of  the  workmen  at  the  expense  of  the  employer 
and  the  insurance  of  the  employer  against  unmeritorious 
claims,  especially  when  the  movement  comprehends  a 
practical  rtmoval  of  all  the  defenses  of  the  emplo3''er  and 
by  so  much  increases  the  hazard  assumed  by  the  insur- 
ance company. 

It  is  not  likely  that  any  such  radical  change  will  be 


EMPLOYERS'  LIABILITY   INSURANCE  375 

made  at  once  in  this  country,  but  we  cannot  fail  to  ob- 
serve the  rapid  strides  made  by  European  countries  in  the 
direction  of  an  improvement  in  the  condition  of  the  work- 
ing classes  and  to  note  that  wherever  such  movements 
are  taking  place  the  difficulties  of  employers'  liability 
insurance  increase  and  its  operations  become  more  com- 
plicated. 

Employers'  liability  insurance  in  the  United  States  is, 
however,  now  an  accomplished  fact  and  a  recognized 
necessity  among  employers  of  labor,  and,  whatever  may 
be  its  final  development,  we  are  able  at  least  to  take  a 
retrospective  view  and  profit  by  past  experience  so  far 
as  it  may  be  of  value  as  a  guide  for  the  future. 

The  year  1887  was  the  first  year  in  which  liability  insur- 
ance was  written  in  this  country  to  any  extent.  While 
some  few  policies  had  been  issued  prior  to  that  time,  it 
was  not  until  1887  that  the  business  was  taken  up  and 
prosecuted  in  any  appreciable  degree.  In  that  year  the 
premiums  received  on  employers'  liability  insurance  pol- 
icies in  this  country  amounted  to  about  $150,000.  From 
that  time  on  the  increase  in  business  has  been  marked. 

Every  year  some  new  requirement  for  such  insurance 
appears,  and  it  is  fair  to  assume  that  we  have  not  by  any 
means  reached  the  limit  of  the  scope  of  this  class  of  insur- 
ance. 

While  employers'  liability  insurance  is  permitted  to  be 
transacted  in  every  state  in  the  Union,  there  is  not  in 
every  case  an  exact  definition  of  this  feature  of  insurance. 
Where  a  definition  is  given  at  all,  it  runs  as  a  rule  closely 
to  the  definition  used  in  the  laws  of  the  State  of  New 
York,  which  is  as  follows: 

"Insuring  any  one  against  loss  or  damage  resulting  from 
accident  to  or  injury  suffered  by  an  employee  or  other 
person  and  for  which  the  insured  is  liable." 

It  will  be  seen  from  this  definition  that  it  was  the  inten- 
tion to  provide  for  insurance,  not  only  of  employers  as 
against  claims  made  by  employees,  but  of  "any  one"  as 


376  YALE  READINGS  IN  INSURANCE 

against  claims  made  by  employees  or  any  other  persons,  so 
that  under  the  feature  of  employers'  liability  insurance 
nearly  all  of  the  states  provide  for  insurance  against  liability 
for  personal  injuries  in  its  broadest  sense.  In  some  of  the 
states  there  has  been  an  effort  to  divide  liability  insurance 
into  its  component  parts  and  to  treat  each  part  as  a  sep- 
arate branch  of  insurance,  but  up  to  this  time  the  whole 
field  covered  by  liability  insurance  is  accepted  in  all  of 
the  states  as  under  one  head. 

The  hazards  other  than  employers'  liability  commonly 
under\M-itten  by  companies  engaged  in  this  line  are,  the 
liability  of  a  manufacturer  or  other  employer  of  labor  for 
injuries  sustained  by  persons  other  than  employees,  caused 
by  the  operations  of  the  business  upon  which  the  insurance 
is  granted  —  this  is  called  public  liability  insurance ;  the 
liability  of  the  owner  of  horses  and  vehicles  for  injuries 
sustained  by  pedestrians  or  others  in  the  public  ways  — 
this  is  called  teams  insm'ance;  the  liability  of  the  owner  or 
tenant  of  a  building  where  elevators  are  used  for  passenger 
or  freight  service,  for  injuries  sustained  by  any  person  or 
persons  —  this  is  called  elevator  insurance ;  the  liability 
of  the  owner  or  lessee  of  any  building  (except  such  as  may 
be  used  by  the  assured  for  manufacturing  purposes)  for 
injuries  sustained  by  any  person  or  persons  by  reason  of 
defects  in  the  building  or  in  the  ways  adjacent  thereto  or 
by  reason  of  defective  elevators  or  negligent  operation 
thereof  —  this  partakes  of  the  nature  of  employers'  lia- 
bility, public  liability,  and  elevator  insurance  combined, 
and  is  called  general  liability  insurance. 

The  hazards  heretofore  named  are  not  the  only  risks 
taken  by  the  companies  under  this  head.  There  are  other 
directions  in  which  liability  insurance  is  tending.  Pro- 
prietors of  theaters  and  other  places  of  amusement  may  now 
obtain  policies  of  insurance  protecting  them  against  claims 
for  injuries  to  their  patrons  or  employees.  Owners  or 
tenants  of  private  dwellings  may  protect  themselves 
against  the  dangers  of  icy  sidewalks,  open  coal  chutes, 


EMPLOYERS'  LIABILITY  INSURANCE  377 

loose  shutters,  etc.  Owners  of  ships  and  other  vessels, 
tugs,  barges,  and  scows  used  for  freightmg  purposes, 
may  also  take  advantage  of  liability  insurance.  And  so 
also  in  connection  with  the  insurance  of  steam  boilers 
against  explosions,  a  feature  of  liability  insurance  is  intro- 
duced. Steam  boiler  insurance  has  been  carried  on  for 
many  years  in  this  country  and  for  a  longer  period  in 
Europe,  but  it  is  only  of  late  years  that  the  policies  have 
been  so  extended  as  to  cover  the  liability  of  the  owner  or 
operator  of  the  boiler  for  damages  by  reason  of  personal 
injuries  in  consequence  of  boiler  explosions. 

As  the  theory  becomes  better  understood  the  possibil- 
ities broaden.  New  lines  are  suggested  by  actual  claims 
that  arise  and  which  are  not  contemplated  by  any  policies 
now  in  vogue  and  it  may  be  predicted  with  safety  that 
the  principle  of  liability  insurance  is  here  to  stay  in  one 
shape  or  another,  but,  as  this  paper  endeavors  to  show, 
surrounded  by  such  difficulties  and  complications  always 
that  it  will  require  more  care  in  its  supervision  and  man- 
agement than  any  other  branch  of  insurance,  because  of 
the  constantly  changing  factors  in  its  underwriting  and 
its  claim  adjustments. 

The  first  underwriters  of  employers'  liability  insurance 
had  practically  no  basis  upon  which  to  work.  A  scale  of 
rates  was  adopted,  based  largely  upon  the  experience  of 
accident  insurance  companies  in  this  country.  This  scale 
was  amended  from  time  to  time  as  it  became  clear  that  a 
risk  hazardous  for  personal  accident  insurance  might  be 
non-hazardous  for  liability  insurance  and  vice  versa.  For 
a  number  of  years,  however,  this  original  scale  of  rates 
was  used  by  most  of  the  companies  as  their  i)ublished  rate 
schedule.  As  a  matter  of  fact,  however,  until  three  years 
ago  there  was  no  actual  scale  of  rates,  each  company 
accepting  business  according  to  its  judgment,  which  in 
many  cases  proved  to  be  bad.  Within  the  last  three 
years,  however,  all  of  the  stock  companies  in  the  country, 
with  perhaps  one  exception,  became  associated  for  the 


378  Y.AJLE  READINGS  IN  INSURANCE 

purpose  of  determining  the  actual  cost  of  insuring  the  many 
different  hazards  to  which  habihty  insurance  is  apphcable. 
It  was  deemed  to  be  wise  to  collate  the  past  experience  of 
all  companies  —  not  with  regard  to  the  amount  of  premiums 
received,  but  with  regard  to  the  actual  expenditure  for  losses 
based  on  the  wages  of  employees  or  otherwise  as  the  case 
might  be  —  to  determine  the  actual  cost  in  loss  payments 
as  against  actual  exposure.  This  work  has  been  and  is 
still  going  on,  and  certain  important  information  has  been 
compiled  from  time  to  time,  resulting  in  many  changes  in 
rates.  After  computing  the  actual  cost  of  any  given 
class  of  business,  it  is  a  comparatively  easy  matter  to  add 
a  sufficient  '' loading"  to  cover  expenses  and  arrive  at  a 
premium  rate  adequate  for  the  hazard,  assuming  that  the 
conditions  will  remain  the  same  in  the  future  as  in  the 
past.  Difficulties,  however,  have  presented  themselves 
in  arriving  at  a  system  of  rates  for  the  reason  that,  as 
stated  elsewhere  in  this  paper,  the  hazards  differ  materially 
in  the  several  states  by  reason  of  the  difference  in  laws 
and  the  difference  in  social  conditions.  The  attempt, 
however,  is  a  step  in  the  right  direction,  and  while  the 
results  thus  far  have  not  been  entirely  satisfactory,  there 
is  no  doubt  that  rate-making  for  employers'  liability  insur- 
ance is  being  gradually  reduced  to  a  science.  In  almost 
any  other  line  of  insurance  the  scale  of  rates  once  estab- 
lished in  this  way  would  be  a  true  guide  for  the  future. 
In  Hability  insurance  the  same  rule  does  not  apply,  because 
a  scale  established  and  found  to  be  correct  for  to-day  might 
be  absolutely  incorrect  for  the  future.  The  only  safe 
rule  appears  to  be  the  making  of  a  scale  by  past  experi- 
ence, and  adding  to  it  the  necessary  factor  of  safety  for 
legislative  and  other  changes  each  year. 

Environment  is  a  serious  factor  in  liability  underwriting. 
Not,  however,  from  the  same  cause  that  governs  other 
lines  of  insurance.  There  are  about  as  many  people 
injured  or  killed  in  a  given  occupation  in  one  part  of  the 
country  as  in  another,  but  the  social  conditions  obtaining 


EMPLOYERS'  LIABILITY   INSURANCE  379 

in  the  different  sections  influence  matters  of  adjustment 
and  of  suits  to  a  greater  degree  periiaps  than  does  the  actual 
difference  in  statutory  provisions. 

In  the  comparatively  new  states  the  population  is  not 
as  homogeneous  as  in  the  older  and  more  conservative 
communities,  where  whole  families  for  generations  have 
been  employed  in  one  industry  or  mill  or  factory.  Under 
the  latter  conditions  few  claims  are  made,  because  the 
employer  is  likely  to  be  in  close  touch  with  his  employees 
and  his  kindly  treatment  for  years  will  always  have  an 
influence  on  his  workmen  and  tend  to  prevent  excessive 
claims  for  slight  injuries. 

On  the  other  hand,  in  localities  where  the  working 
classes  are  made  up  largely  of  immigrants  from  foreign 
countries,  or  in  any  event  is  of  a  cosmopolitan  character, 
no  such  good  feeling  exists  or  is  likely  to  exist,  and  when 
claims  are  made  for  indemnity  on  account  of  injuries 
sustained,  the  sums  demanded  assume  proportions,  which 
if  paid,  would  be  a  menace  to  the  successful  continuance 
of  a  business  or  trade  where  mechanical  labor  is  a  chief 
factor;  and  in  such  communities  when  claims  are  resisted 
and  carried  into  the  courts  unreasonable  verdicts  are 
frequently  the  result,  presumably  because  the  juries  are 
to  a  great  extent  in  sympathy  with  the  working  people 
as  against  corporations  and  capitalists. 

Beyond  these  factors  in  environment  is  the  variation 
of  statistics  and  the  application  of  the  law  in  the  several 
states  of  the  country.  In  some  states  the  fellow-s(Tvant 
rule  is  strictly  adhered  to,  while  in  others  this  rule  is  made 
elastic  and  decisions  are  usually  favorable  to  the  injured 
person;  and  in  still  others  the  rule  is  abrogated  altogether. 
Promise  to  repair,  proximate  cause,  contributory  negli- 
gence, presumption  of  negligence  and  many  other  legal 
subtilities,  are  also  widely  divergent  in  application,  to 
such  an  extent  that  in  the  matter  of  underwriting  and  rate- 
making  all  these  conditions  must  be  considered  as  having 
a  direct  relationship  to  the  selection  of  risk. 


380  YALE  READINGS  IN  INSURANCE 

The  premium  charge  on  employers'  liability  insurance 
is  based  on  the  aggregate  wages  of  all  employees.  The 
question,  therefore,  of  the  average  rate  of  wages  has  a 
direct  bearing  on  the  hazard.  The  average  annual  wages 
of  workmen  in  the  United  States  is  shown  by  the  last 
census  to  be  something  less  than  $500.  The  use  of  the 
total  pay-roll  of  any  establishment  as  the  basis  of  the 
premium  charge  is  on  the  theory  that  the  wage  expendi- 
ture will  be  a  correct  indication  of  the  number  of  employees 
actually  engaged.  Manifestly,  then,  the  actual  basis  of 
the  premium  is  the  number  of  employees  exposed  to  the 
given  hazard  for  one  year,  and  the  accepted  method  of 
computation  at  a  certain  rate  for  each  one  hundred  dollars 
of  wages  expended  is  on  the  assumption  that  the  general 
average  is  always  true. 

The  total  amount  of  pay-roll  during  the  term  of  the 
policy,  whether  it  be  for  a  year  or  a  longer  or  shorter 
period,  indicates  the  amount  of  the  premium.  A  pay-roll 
of  $100,000  is  taken  to  be  equivalent  to  the  exposure  of 
200  employees  for  one  year,  or  400  employees  for  six 
months  and  so  on. 

The  general  average  of  wages,  however,  does  not  always 
obtain,  and  it  is  a  notable  fact  that  the  nature  of  employ- 
ment and  the  character  of  workmen  in  some  states  decrease 
the  premium  per  capita,  by  reason  of  the  low  rate  of  wages, 
while  the  hazard  is  nowise  proportionately  improved, 
but,  on  the  contrary,  is  likely  to  be  worse,  because  of  the 
lower  grade  of  intelligence  of  the  laborers. 

It  is  a  fair  assumption  that  no  two  states  are  exactly 
alike  from  the  standpoint  of  underwriting,  and  this  sets 
up  another  difficulty  in  the  way  of  establishing  any  rule 
of  procedure  which  would  be  mathematically  correct  for 
the  whole  country.  The  iniquitous  system  of  taxation  in 
operation  in  some  of  the  states  has  an  important  bearing 
on  the  cost  of  conducting  business  in  such  states,  and 
while  it  is  not  always  wise  for  insurance  corporations 
to  discriminate  against  certain   sections  they   cannot  be 


EMPLOYERS'  LIABILITY   INSURANCE  381 

expected  to  discriminate  in  favor  of  places  where  additional 
burdens  are  placed  upon  them.  Each  state  at  least  must 
be  rated  and  underwritten  on  the  basis  of  the  existing  or 
changing  conditions  to  be  found  in  the  given  locality,  and, 
as  the  risks  are  necessarily  very  much  scattered,  the 
statistical  information  compiled  by  any  one  company 
is  not  of  great  value,  except  in  the  most  populous  manu- 
facturing states.  The  ultimate  value,  therefore,  of  a 
perfect  compilation  of  the  statistics  of  all  the  companies 
engaged  in  the  business  cannot  be  overestimated. 

In  the  matter  of  expenses,  it  may  be  interesting  to  make 
some  comparisons.  It  may  be  fairly  assumed  that  the 
commissions  paid  to  agents  and  brokers  on  liability  busi- 
ness are  far  in  excess  of  like  expense  on  other  lines,  where 
the  premiums  are  large. 

The  commission  rate  may  very  properly  be  said  to  be 
in  the  hands  of  the  individual  company  to  control,  but  it 
will  be  well  understood  that  a  precedent  in  this  respect 
having  been  once  established,  it  is  practically  impossible 
to  change  without  uniformity  of  action  on  the  part  of  all 
companies;  and  as  the  agencies  of  many  of  the  companies 
are,  and  have  been  for  many  years  established  on  a  salary 
basis,  equivalent  to  a  high  commission  rate,  there  seems  to 
be  no  likelihood  of  reform  in  this  direction  in  the  near 
future. 

Personal  accident  insurance  has  always  been  subject  to 
a  high  commission  rate,  and,  as  most  of  the  companies  now 
engaged  in  liability  business  established  their  field  agenices 
originally  for  personal  accident  insurance,  there  seems  to 
be  no  doubt  that  the  high  accident  commissions  influenced 
somewhat  the  rate  paid  for  commissions  on  liability  insur- 
ance. The  rates  of  connnission  on  the  latter  have  not, 
however,  reached  the  average  of  accident  business,  and  it 
is  generally  agreed  that  the  present  commission  on  liabil- 
ity insurance  is  excessive,  considering  the  size  of  the  premi- 
ums involved,  and  considering  also  that  high  commissions 
on  large  premiums  open  the  way  to  the  rebate  evil  which 


382  YALE  READINGS  IN  INSURANCE 

has  become  a  menace  to  other  hnes  of  insurance.  The 
employment  also  of  salaried  men  at  all  principal  points 
for  purposes  of  survey  and  examination  of  risks  on  behalf 
of  the  companies  is  no  inconsiderable  item  of  additional 
expense. 

The  foregoing  refers  only  to  the  expense  of  securing  the 
business.  The  expense  of  caring  for  the  business  after  it 
is  once  on  the  books  of  the  company  is  infinitely  greater 
than  that  of  any  other  line  of  insurance  known.  The 
clerical  staff  must  be  more  numerous  and  more  than  ordi- 
narily skilled  in  the  business,  the  various  details  of  the 
work  requiring  constant  care  and  oversight.  The  loss 
adjusting  department  must  be  supervised  by  men  of  the 
highest  order  of  ability  and  the  detail  work  in  this  depart- 
ment requires  more  skill  and  a  higher  grade  of  men  than 
would  be  requisite  in  many  other  lines  of  insurance.  It 
may  be  said  that  every  adjuster  employed  by  the  com- 
pany must  have  a  considerable  knowledge  of  the  law  and 
at  the  same  time  possess  the  qualifications  of  a  level-headed 
business  man. 

It  may  be  stated  with  some  degree  of  accuracy  that  for 
every  thousand  policies  issued  there  will  be  in  the  neigh- 
borhood of  one  thousand  notices  of  accident  annually. 
Under  some  policies  there  will,  of  course,  be  more  than 
under  others,  but  considering  that  many  of  the  policies 
cover  work  involving  the  employment  of  large  numbers 
of  men  it  is  not  surprising  that  few,  except  the  very  small 
risks,  escape  without  any  accidents. 

Each  claim  that  arises  must  be  carefully  investigated 
and  is  likely  to  require  many  visits  and  continued  expense. 
The  claim  is  not  against  the  company,  but  it  is  a  demand 
made  on  the  policy-holder  to  whom  the  company  stands 
in  the  relationship  of  counsel.  It  is  not,  therefore,  a 
matter  of  ascertainng  the  amount  of  the  claim  and  effect- 
ing a  settlement  for  the  company,  but  an  examination  of 
all  the  facts  with  view  of  setting  up  a  proper  defense  for 
the  assured  in  the  event  of  an  action  at  law,  or  of  effecting 


EMPLOYERS'   LIABILITY   INSURANCE  383 

a  compromise  on  behalf  of  the  assured  should  it  appear  that 
the  injuries  were  caused  by  his  negligence.  This  necessa- 
rily often  introduces  the  services  of  lawyers  into  the  cases, 
and,  as  lawyers  are  probably  the  best  paid '  professional 
men  in  this  country,  it  may  be  truthfully  asserted  that  to 
the  lawyer  is  attributable  a  large  part  of  the  expense 
ratio  of  liability  insurance  companies. 

Expert  mechanical  inspections  also  add  to  the  expense 
of  the  business.  Each  company  must  maintain  a  bureau 
for  the  periodical  inspection  of  risks.  A  staff  of  inspec- 
tors, skilled  mechanics,  must  be  employed,  and  the  assured 
must  be  afforded  the  protection  of  this  service  in  addition 
to  the  indemnity  provided  by  the  policy. 

It  is  estimated  that  at  the  present  time  about  S500,000 
is  paid  out  for  mechanical  inspections  by  liability  insur- 
ance companies  annually,  and  for  the  most  part  this 
amount  is  expended  for  steam  boiler  and  elevator  inspec- 
tions. The  inspection  feature  in  these  two  branches  of 
insurance  is  of  paramount  importance.  While  it  camiot 
be  shown  definitely  in  how  many  instances  inspections 
have  prevented  accidents,  it  is  nevertheless  true  that  in 
many  cases  serious  defects  have  been  discovered  and 
remedied.  Certain  it  is  that  inspections  at  stated  inter- 
vals by  practical  men  who  are  trained  mechanical  engi- 
neers have  a  desirable  effect  upon  employer  and  employee, 
and  tend  to  good  order  and  method  where  otherwise  there 
would  exist  every  opportunity  for  accident. 

While  the  larger  part  of  the  expense  for  inspections  is 
chargeable  to  the  two  branches  mentioned,  general  inspec- 
tions are  being  extended  to  all  important  risks,  and  the 
expense  of  this  department  of  the  business  is  likely  to  be 
increased  by  the  addition  of  new  and  untried  hazards. 
The  original  theory  of  liability  insurance  was  the  protec- 
tion of  the  assured  against  heavy  financial  loss.  The 
practical  administration  of  it,  however,  contemplates  the 
payment  of  many  small  losses  which  come  within  th(;  limits 
stipulated  in  the  policy.     If  it  were  possible  with  safety 


384  YALE  READINGS  IN  INSURANCE 

to  the  insurer  to  eliminate  the  small  losses  and  pay  only 
those  beyond  a  certain  stated  amount,  the  expense  ratio 
might  be  very  nmch  reduced,  but  this  does  not  appear  to 
be  practicable.  Small  losses  left  to  the  assured  to  adjust 
would  grow  into  large  ones,  and  the  only  safety,  there- 
fore, of  the  company  insuring  would  be  the  handling  of 
every  claim,  even  if  the  assured  paid  the  damages  within 
certain  limitations.  By  this  method  the  companies' 
losses  would  be  reduced,  but  the  actual  amount  paid  out 
for  expenses  would  remain  the  same,  while  on  the  other 
hand,  the  premiums  being  proportionately  reduced  by 
reason  of  the  lessened  hazard  carried  by  the  companies, 
the  expense  ratio  would  be  materially  increased. 

The  reserve  on  life  insurance  policies,  being  computed 
on  the  net  premium,  is  easily  arrived  at,  because  there  is 
a  well  defined  rule  for  determining  the  net  cost.  In 
casualty  insurance,  however,  the  net  cost  has  not  yet  been 
reduced  to  a  science,  and  until  such  time  as  the  experi- 
ence of  all  companies  is  collected,  and  the  proper  rule 
established  it  will  be  impossible  to  compute  the  reserve 
on  casualty  policies  by  any  such  method  as  is  used  by 
life  insurance  companies.  It  is  true  also,  as  shown  else- 
where in  this  paper,  that  there  are  difficulties  in  the  way 
of  arriving  at  any  true  rule  for  establishing  the  net  cost 
for  liability  insurance,  on  account  of  the  changes  that  are 
constantly  occurring  by  reason  of  new  legal  decisions  and 
the  enactment  of  new  statutes.  It  is  therefore  probable 
that  the  only  available  means  of  computing  the  reserve 
on  net  cost  is  to  arrive  at  such  net  cost  by  taking  from 
the  premium  the  approximate  amount  of  expenses. 

It  may  be  added  here  that  this  statement  is  made  with- 
out any  desire  to  advocate  a  reduction  of  proper  reserves; 
but  a  reinsurance  reserve  has  no  relationship  whatever  to 
earned  premiums,  and  if  the  earned  premium  of  six  months 
less  all  expenses  of  securing  business  is  deemed  sufficient 
to  carry  the  first  six  months,  then  certainly  the  unearned 
premium  of  the  remaining  six  months,  less  one-half  of 


EMPLOYERS'  LIABILITY  INSURANCE  385 

such  expense  should  be  an  adequate  provision  for  the 
second  six  months. 

If  such  a  reserve  be  not  sufficient,  then  the  difficulty 
lies  with  the  rate,  and  it  is  there  the  adjustment  should  be 
made.  This  question  of  rate-making  is  now  being  carefully 
studied  by  all  the  companies  having  any  experience  to 
guide  them,  and  many  changes  have  already  been  made, 
having  always  in  view  the  establishment  of  rates  adequate 
to  the  various  hazards  involved.  It  is  to  be  hoped  that 
the  restrictions  placed  upon  fire  insurance  companies  in 
some  states,  preventing  cooperation  in  establishing  fair 
and  equitable  rates,  will  not  be  applied  to  the  casualty 
companies. 

The  adjusting  of  losses  under  liability  policies  is  ad- 
mitted to  be  far  more  difficult  than  adjustments  under 
any  other  form  of  insurance.  As  an  example  of  this, 
almost  any  case  may  be  selected.  The  assured  notifies 
the  company  that  one  of  his  employees  has  met  with  an 
injury.  It  is  usual  for  the  company  to  furnish  the  em- 
ployer with  printed  forms  for  this  purpose.  The  adjusting 
department  of  the  company  on  examination  of  the  report 
may  and  often  does  find  a  lack  of  detailed  information 
concerning  occupation,  rate  of  wages,  place  of  accident, 
particulars  of  accident,  and  description  of  injury.  In 
very  few  cases  is  the  information  given  sufficient  to  deter- 
mine whether  or  not  the  employer  is  liable  by  reason  of 
negligence.  It  is  therefore  necessary  for  the  company  to 
send  an  investigator  to  make  a  personal  inquiry  into  the 
facts.  The  investigator  gathers  all  information  obtain- 
able from  the  employer  and  also  from  witnesses,  and 
makes  his  report  to  the  company.  From  this  report 
the  company  may  be  able  to  base  an  opinion  as  to  the 
liability  of  its  assured  for  the  accident.  Frequently,  how- 
ever, a  single  accident  will  require  numerous  visits  to  the 
scene  of  its  occurrence  before  all  the  facts  can  be  brought 
out. 

When  the  company  finds  there  is  no  liability  in  the  case 


386  YALE  READINGS  IN   INSURANCE 

against  the  assured,  he  is  so  notified  and  the  injured  per- 
son is  not  approached  at  all.  The  papers  in  the  case 
are  carefully  filed,  and  all  the  information  is  at  hand  in  the 
event  of  a  future  claim  on  account  of  the  given  accident. 

If,  on  the  other  hand,  it  appears  to  be  a  case  of  negli- 
gence, and  a  claim  is  likely  to  be  made,  negotiations  are 
at  once  begun  for  an  adjustment  as  between  the  employer 
and  the  employee,  the  company's  representative  acting  as 
the  representative  of  the  employer. 

Then  the  actual  work  of  adjusting  begins.  Before  an 
actual  settlement  is  accomplished  and  a  release  given, 
one  or  more  representatives  of  the  company  have  made 
visit  after  visit  to  the  employer  and  the  injm-ed  person; 
witnesses  have  been  examined  and  their  sworn  statements 
taken;  it  has  been  necessary,  perhaps,  to  employ  a  physi- 
cian to  make  a  physical  examination  of  the  injured  person, 
and  in  the  meantime  the  case  may  have  been  placed  in 
the  hands  of  a  lawyer  by  the  claimant.  A  case  which 
looked  trivial  in  the  beginning  may  be  the  occasion  of 
more  negotiation  and  expense  in  adjustment  than  a  really 
meritorious  claim.  Ignorant  persons,  guided  by  the  per- 
nicious advice  of  unscrupulous  lawyers,  will  frequently 
press  claims  in  which  there  is  no  merit  whatever. 

Within  the  past'  few  years,  and  particularly  since  the 
advent  of  employers'  liability  insurance,  our  court  calendars 
have  been  filled  with  accident  cases  hunted  up  by  a  species 
of  lawyer  known  as  the  ambulance  runner.  These  men 
are  a  great  menace  to  the  public  and  to  the  employers' 
liability  companies.  They  keep  themselves  well  posted 
by  frequent  examinations  of  police  reports  and  otherwise 
as  to  every  accident  that  happens,  and  frequently  a  person 
who  has  suffered  a  trifling  injury  will  be  visited  by  several 
such  lawyers  in  the  endeavor  to  magnify  the  injury  into 
important  proportions  and  to  encourage  the  making  of  an 
exorbitant  claim.  Reputable  lawyers  do  not  lend  them- 
selves to  such  tactics.  It  makes  little  difference  to  the 
ambulance  runner  whether  his  client  has  a  case  or  not,  so 


EMPLOYERS'   LIABILITY   INSURANCE  387 

long  as  he  is  given  an  opportunity  to  bring  suit  against 
some  one,  depending  upon  the  probabihty  that  the  person 
sued  would  in  any  event  be  willing  to  pay  him  a  small 
sum  rather  than  pay  some  other  lawyer  a  large  fee  to  defend. 
He  is  looking  out  for  himself  rather  than  for  his  client  in 
nearly  every  case,  and  naturally  sees  in  the  liability  insur- 
ance company  an  opportunity  for  piracy  of  this  nature 
which  did  not  exist  before  such  insurance  became  an  estab- 
lished fact  in  this  country.  It  does  not  take  long,  how- 
ever, in  any  locality,  to  ascertain  which  of  the  lawyers 
have  this  versatile  ambulance-chasing  propensity  and 
they  receive  scant  courtesy  from  the  companies  when 
discovered. 

Under  these  circumstances  it  is  obvious  that  the  esti- 
mating of  ultimate  cost  of  outstanding  or  resisted  claims 
is  altogether  a  matter  of  opinion,  and  naturally  opinions 
differ  on  this  subject.  Some  companies,  taking  past 
experience  as  a  basis,  assume  that  all  notices  or  reports 
of  injury  received  will  cost  on  the  average  a  certain  sum 
in  settlement,  that  all  suits  brought  will  average  in  cost 
of  settlement  a  certain  stated  amount,  and  cases  appealed 
from  lower  courts  will  cost  a  proportionately  higher  amount. 
Other  companies  estunate  each  case  according  to  the  cir- 
cumstances surrounding  it.  It  is  difficult  to  say  which 
comes  nearer  to  being  right. 

It  appears  to  be  true  that  in  the  early  years  of  the 
business  in  this  country  most  of  the  risks  written  were 
those  that  required  little  or  no  solicitation  by  the  com- 
panies, because  the  employers  recognized  the  hazardous 
nature  of  their  work  and  gladly  availed  themselves  of  the 
opportunity  to  insure. 

Employers,  however,  did  not  recognize  altogether  the 
necessity  of  reporting  every  injury.  Those  that  were 
considered  trifUng  cases  at  the  time  of  accident  were  not 
reported,  but  sucli  as  were  reported  proved  expensive  to 
the  underwriters,  because  of  the  hazardous  nature  of  the 
business.     As  time  went  by  it  was  found  frequently  that 


388  YALE  READINGS  IN  INSURANCE 

a  case  which  appeared  to  be  a  trivial  accident  at  the  out- 
set grew  in  proportions,  and  clauns  were  often  made  in 
cases  where  it  was  supposed  by  the  employer  that  the 
injured  employee  had  no  intention  of  seeking  indemnity. 
As  the  volume  of  business  increased,  too,  and  employers 
became  more  familiar  with  the  insurance  that  was  offered 
by  the  companies,  its  adoption  became  more  general  and 
persons  who  theretofore  had  not  taken  advantage  of  it 
applied  for  policies.  In  this  way  through  the  large  staffs 
of  solicitors  employed  by  the  various  companies  and  the 
consequent  general  education  of  employers  to  a  knowl- 
edge of  the  value  of  insurance,  the  less  hazardous  risks 
became  insured  and  the  assured  became  more  careful  in 
reporting  accidents,  so  that  at  this  time  it  is  probable 
that  the  average  number  of  notices  of  injury  per  annum 
is  greater  for  the  same  number  of  workmen  than  at  the 
inception  of  this  branch  of  insurance.  Many  establish- 
ments now  report  injuries  of  the  most  trivial  nature, 
which,  if  estimated  on  the  basis  of  the  experience  of  earlier 
years,  would  indicate  a  premium  rate  far  in  advance  of 
that  actually  needed,  so  that  at  the  present  time  there  does 
not  appear  to  be  any  sound  basis  for  estimating  the  actual 
average  cost  of  each  notice.  Such  a  figure  may  be  reached 
when  the  business  has  run  over  a  term  of  years  sufficient 
to  base  such  an  average  on  an  actual  earned  premium  of 
large  amount;  but  again  in  this  connection  appears  an- 
other difficulty.  An  employer  takes  out  a  policy  in  a  state 
where  the  statute  of  limitations  is  three  years.  The  com- 
pany must  protect  him  for  any  loss  occurring  during  the 
life  of  his  policy,  for  which  claim  is  made  upon  him  dur- 
ing the  term  of  the  statute,  provided,  of  course,  he  has 
given  the  company  notice  of  such  an  accident  at  the  time 
of  its  occurrence.  The  statute  of  limitations  varies  in 
different  states,  from  one  year  in  some  states  to  seven 
years  in  others,  so  that  it  may  be  said  that  the  premium 
of  any  given  year  cannot  be  fully  earned  until  the  time 
of  the   statute   of  limitations  has  entirely  elapsed.    To 


EMPLOYERS'   LIABILITY  INSURANCE  389 

arrive,  therefore,  at  an  actual  basis  for  any  given  period 
of  years,  the  time  of  the  statute  of  limitations  must  have 
expired  on  all  risks  of  the  last  year  of  such  period  in  every 
state  where  the  business  is  conducted.  There  is  little 
doubt  that  the  best  method  of  estimating  the  value  of 
outstanding  losses  is  to  compute  the  average  cost  per 
notice,  the  average  cost  per  suit  and  the  average  cost  for 
each  appeal,  provided  this  average  cost  can  be  correctly 
determined.  Considering,  however,  the  constant  changes 
in  laws,  considering  the  inclination  of  legislators  in  the 
direction  of  providing  workmen  with  indemnity  for  acci- 
dental injuries,  and  considering  the  slow  but  sure  progres- 
sion of  public  sentiment  in  favor  of  laws  such  as  have  been 
enacted  in  many  of  the  countries  of  Europe  for  the  pro- 
tection of  the  working  classes,  it  would  seem  almost  impos- 
sible ever  to  arrive  at  a  true  rule,  because  every  year  would 
be  likely  to  change  the  conditions.  Under  these  circum- 
stances, it  appears  as  if  the  estimating  of  each  case  on  its 
merits  is  best,  for  the  reason  that  when  a  case  is  estimated 
the  prevailing  conditions  are  known  and  are  taken  into 
consideration  and  the  company  is  more  likely  to  adopt  a 
factor  of  safety  for  each  year's  business  than  if  it  depended 
on  a  complete  change  of  its  average  estimate  each  year. 

Opinions  differ  widely  as  to  the  wisdom  of  litigation  by 
companies  engaged  in  liability  insurance.  It  has  been 
said  on  the  one  hand  that  the  company's  advice  to  the 
assured  should  be  exactly  that  of  the  assured's  counsel 
under  similar  circumstances.  On  the  other  hand,  it  will 
be  admitted  that  the  counsel  of  the  assured  in  advising 
his  client  is  not  by  any  means  in  the  same  position  as 
the  insurance  company  with  the  function  of  loss  payer  as 
well  as  adviser.  It  is  reasonable  to  suppose,  of  course, 
that  the  lawyer  will  give  the  best  advice  that  his  judgment 
dictates.  It  is  clear  also  that  the  insurance  company 
should  give  the  best  advice,  not  only  by  its  judgment, 
but  by  its  actual  experience  in  litigation,  because  it  has 
to  pay  the  judgment  for  damages,  if  one  is  obtained  by  the 


390  YALE  READINGS  IN  INSURANCE 

injured  party.  The  business  in  this  country  has  not  yet 
reached  that  stage  where  it  can  be  said  with  any  degree  of 
certainty  which  is  the  better  poHcy.  It  is  perhaps  fair 
to  assume,  however,  that  the  more  acceptable  method  so 
far  as  the  assured  is  concerned  is  a  prompt  settlement  and 
a  full  release;  and,  under  ordinary  circumstances,  settle- 
ments can  be  made  to  better  advantage,  if  negotiated  at 
once,  than  if  allowed  to  drift  into  the  hands  of  unscrupu- 
lous attorneys  whose  exorbitant  fees  immediately  swell  the 
amount  demanded.  There  is  good  reason  to  believe  that 
some  sort  of  a  payment  for  every  claim  that  arises  would 
result  in  establishing  dangerous  precedents  in  large  estab- 
lishments, but,  it  is  contended,  if  every  claim  is  settled 
and  put  aside  at  once  there  is  not  likely  to  be  danger  of 
claims  accumulating  later  on.  There  seems  to  be  no 
doubt,  therefore,  that  the  most  acceptable  plan  to  the 
assured  is  immediate  adjustment  when  a  claim  arises, 
and  there  seems  to  be  no  doubt  also  that  with  care  and 
good  judgment  in  settlements  this  method  would  be  the 
best  one  for  the  companies  to  follow.  As  has  already 
been  stated,  however,  there  is  a  wide  divergence  of  opinion 
on  this  subject,  some  insurers  believing  that  where  a 
claim  is  not  meritorious,  it  should  be  fought  to  the  bitter 
end,  while  others  contend  that  even  in  such  cases,  if  a 
reasonable  settlement  can  be  effected  for  a  sum  not  far 
in  excess  of  the  cost  of  litigation,  the  result  as  a  whole 
will  be  less  expensive  for  the  company  than  any  system 
of  adjudication  through  the  courts.  Time  alone  will 
prove  which  of  the  methods  outlined  above  is  correct; 
but  thus  far  those  insurers  who  have  undertaken  by 
prompt  action  to  clear  away  liability  have  shown  the  best 
results,  while  those  who  have  built  up  a  large  outstanding 
liability  by  reason  of  suits  against  policy-holders,  are  as 
far  away  as  ever  from  the  final  determination.  This  propo- 
sition does  not  apply  equally  to  all  classes  of  liability  busi- 
ness. In  pure  employers'  liability  insurance,  settlements 
are  more  easily  made  than  in  some  other  branches  where 


EMPLOYERS'   LIABILITY  INSURANCE  391 

the  factor  of  public  liability  enters;  but  as  an  offset  to 
this,  while  public  liability  cases  frequently  require  liberal 
adjustments,  so  do  they  often  result  in  large  verdicts  if 
allowed  to  go  to  trial. 

It  may  be  well  to  point  out  one  danger  which  is  likely 
to  be  overlooked  by  beginners  who  have  had  no  consider- 
able experience  in  the  business. 

The  result  of  the  first  year's  operations  at  the  prevailing 
rates  of  to-day  is  likely  to  indicate  so  handsome  a  profit 
that  the  inexperienced  manager  may  be  misled  into  the 
belief  that  the  rates  are  excessive.  There  is  probably  no 
other  line  of  insurance  so  deceptive  in  this  respect.  The 
final  results  of  the  first  year's  business  will  not  be  known 
until  the  time  fixed  in  the  statute  of  limitations  has  ex- 
pired, and  if  business  is  transacted  in  states  where  the 
statute  extends  six  or  seven  years  it  will  be  seen  over  how 
long  a  period  the  business  must  run  before  the  actual  loss 
may  be  determined.  Then,  too,  in  case  of  accident  to  a 
minor,  suit  may  be  brought  after  he  reaches  his  majority, 
and  the  company  must  protect  the  employer  if  he  held  a 
policy  at  the  time  of  the  accident  and  fulfilled  all  its 
conditions. 

It  is  estimated  that  the  loss  shown  as  having  been  paid 
on  a  given  year's  business  at  the  end  of  the  second  year 
will  be  at  least  doubled  before  a  final  determination  of  the 
business  of  that  year. 

Notwithstanding  all  the  difficulties  of  conducting  liabil- 
ity insurance,  it  is  believed  that  it  has  become  an  estab- 
lished factor  in  the  operation  of  business  in  this  country 
and  that  its  scope  will  broaden  as  time  goes  by.  Legisla- 
tion will  undoubtdly  affect  it  from  time  to  time,  but  the 
principle  will  still  remain,  whatever  the  local  conditions, 
and  these  conditions  will  tend  rather  to  regulate  under- 
writing than  to  discredit  the  business. 


CHAPTER  XXI 


GOVERNMENT   INSURANCE 


A  COMPLETE  survey  of  this  field  would  involve  treating  it 
from  a  number  of  different  points  of  view.  Thus  we  might 
distinguish  between  the  different  kinds  of  government  insur- 
ance: 

(a)  According  to  the  risks  for  which  indemnity  is  given, 
and  distinguish  fire  insurance,  life  insurance,  hail  insurance, 
accident  insurance,  etc.  This  would  be  a  mere  duplication 
of  the  classification  adopted  for  the  earlier  part  of  this 
course ; 

(6)  According  to  the  objects  for  which  indemnity  is 
given.  We  should  thus  distinguish  house  insurance,  furni- 
ture insurance,  live-stock  insurance,  etc.; 

(c)  According  to  the  exclusiveness  of  the  government 
business,  in  which  case  we  should  treat  of  insurance  under 
government  monopoly  and  of  competitive  insurance; 

(d)  According  to  the  compulsion  brought  to  bear  upon 
the  persons  insured,  in  which  case  we  should  distinguish 
between  voluntary  and  compulsory  insurance; 

(e)  According  to  the  incidence  of  the  burden  of  insur- 
ance. In  this  case  we  should  distinguish  between  insurance 
which  is  borne  entirely  by  the  persons  insured,  insurance 
which  is  borne  by  other  classes  of  the  population,  and 
insurance  which  is  supported  by  the  state  from  the  pro- 
ceeds of  general  taxation.  Or  we  might  also  have  any 
combination  of  these  cases,  such  as  insurance  borne  partly 

'  By  Henry  W.  Famam,  Professor  of  Political  Economy  in  Yale 
University.  Reprinted  with  additions  from  pages  283-303  of  the  "  Yale 
Insurance  Lectures,  Fire  and  Miscellaneous." 

392 


GOVERNMENT  INSURANCE  393 

by  the  insured,  partly  by  the  members  of  another  class, 
and  partly  by  the  state. 

Such  a  complete  treatment  would  not  only  carry  us  far 
beyond  the  limits  of  time  devoted  to  this  subject,  but  it 
would  also  fail  to  emphasize  what  seems  to  be  the  typical 
feature  of  government  insurance.  And,  while  a  complete 
historical  treatment  would  involve  considering  all  of  these 
different  kinds  of  government  insurance,  it  seems  wiser 
to  concentrate  the  attention  on  certain  elements  and  to 
refer  only  by  way  of  introduction  to  the  others. 

Insurance  has  been  stated  by  one  of  the  lecturers  to  be 
in  the  nature  of  a  tax.  It  is  a  payment  made,  not  under 
legal  compulsion,  but  under  pressure,  in  order  to  guard 
against  the  consequences  of  a  contingent  evil.  The  con- 
verse is  also  within  limits  true.  Many  taxes  are  a  kind  of 
insurance.  We  pay  money  to  support  the  police,  the 
courts,  the  fire  department,  the  army  and  navy,  not  be- 
cause we  expect  to  obtain  a  positive  good  from  the  expendi- 
ture of  the  money,  but  because  we  wish  to  be  protected 
against  a  possible  evil,  such  as  the  invasion  of  our  property 
rights,  the  burning  down  of  our  homes,  the  attack  of  a 
foreign  enemy. 

The  difference  between  the  two  lies  not  so  much  in  the 
purpose  as  in  the  method  of  determining  the  amount  of 
individual  contributions.  In  insurance,  the  premium  is 
based  upon  a  mathematical  calculation  of  the  risk.  The 
wooden  house  pays  more  than  the  brick  house.  In  the  case 
of  taxes  the  payment  is  based  upon  some  entirely  different 
consideration,  usually  some  criterion  which  is  supposed  to 
indicate  the  ability  of  the  taxpayer,  rather  than  his  lia- 
bility to  call  upon  the  governmc^nt  for  some  service.  The 
strong  man  pays  as  much  for  police  protection  as  the  weak 
man,  if  his  property  is  assessed  at  the  same  value.  The 
rich,  strong  man  may  pay  very  many  times  more;  than  the 
poor,  weak  man,  even  though  he  may  be  much  less  liable 
to  call  for  the  help,  either  of  the  police  or  of  the  fire  depart- 
ment. 


394  YALE  READINGS  IN  INSURANCE 

Inasmuch  as  many,  though  by  no  means  all,  of  the  func- 
tions of  the  government  have  so  much  analogy  with  the 
operations  of  insurance,  it  would  seem  to  be  a  very  natural 
thing  that  the  government  should  go  into  the  business, 
provided  any  advantage  could  be  obtained.  Among  many 
that  might  be  named  there  are  two  advantages  in  particular 
that  deserve  especial  consideration: 

(1)  It  may  be  that  the  government  can  command  more 
skilful  actuaries  or  a  larger  capital  than  private  companies, 
so  that  it  is  in  a  position  to  carry  on  the  business  as  a 
business  with  greater  efficiency.  This  hypothesis  would 
hardly  apply  to  our  country,  and  yet  it  is  conceivably  true 
in  countries  in  which  the  civil  service  is  of  a  higher  grade 
and  the  average  business  man  of  a  lower  grade  than  in  the 
United  States. 

(2)  Another  advantage  to  be  gained  from  government 
insurance  may  lie  in  the  fact  that  the  government  can  make 
use  of  its  taxing  and  of  its  governing  power  to  carry  it 
through.  In  other  words,  it  need  not  conduct  its  business 
on  actuarial  principles  exclusively.  It  can  give  certain 
classes  benefits  out  of  proportion  to  the  premiums  which 
they  pay.  In  other  words,  it  can  combine  the  quasi  tax 
of  the  insurance  company  with  the  real  tax  imposed  by  a 
sovereignty.  If  it  decides  to  do  this,  it  is  not  guided  by 
merely  commercial  considerations.  It  hopes  to  influence 
the  distribution  of  wealth.  Moreover,  it  has  one  advan- 
tage which  the  insurance  company  does  not  enjoy  —  it  can 
make  its  insurance  compulsory.  Thus  not  only  may  a  real 
tax  be  used  to  pay  for  the  support  of  insurance,  but  the 
premiums  based  upon  actuarial  principles  may  themselves 
become  a  tax  collected  by  the  authority  of  the  state,  and 
foresight  may  become  compulsory. 

What  we  have  to  consider  in  these  lectures  is,  therefore, 
the  effect  on  insurance,  of  whatever  kind  it  may  be,  of 
this  kind  of  government  action.  Conceivably  this  action 
might  be  applied  to  any  of  the  risks  of  life,  fire,  accident, 
superannuation,  even  unemployment.     Practically  it  has 


GOVERNMENT  INSURANCE  395 

been  applied  most  extensively  to  the  risks  to  which  certain 
classes  are  especially  exposed,  and  is  known  as  working- 
men's  insurance. 

To  give  even  a  brief  history  of  governmental  insurance 
schemes  would  carry  us  far  beyond  the  limits  of  these  lec- 
tures. What  I  shall  attempt  will  be,  first  to  sketch  the 
history  of  earlier  types  of  government  insurance,  then  to 
describe  in  more  detail  and  analyze  critically  the  peculiar 
combination  of  tax  and  premium  which  I  have  just  de- 
scribed. I  shall  not  base  my  deductions  upon  any  a  priori 
grounds,  but  I  shall  endeavor  to  interpret  as  well  as  possible 
the  most  exact  data  which  we  have.  These  necessarily 
cover  but  a  limited  field,  and  a  comparatively  short  time. 
I  do  not  claim  that  we  can  expect  any  final,  incontrover- 
tible results,  but  I  do  believe  that  we  have  enough  data 
to  indicate  some  tendencies  pretty  strongly,  and  thus  to 
pave  the  way  for  future  and  more  conclusive  investiga- 
tions. 

The  prevalence  of  government  insurance  depends  natu- 
rally upon  the  general  policy  of  states.  Those  common- 
wealths which  in  modern  times  have  tended  to  elaborate 
governmental  functions  in  general  are  those  in  which  we 
find  the  greatest  prevalence  of  government  insurance. 
Those,  on  the  other  hand,  in  which  private  enterprise  has 
been  given  free  scope  are  those  in  which  government  insur- 
ance is  either  entirely  absent  or  reduced  to  a  minimum. 
In  the  former  class  we  find  two  distinct  and  in  some  respects 
antithetical  types  of  government.  On  the  one  hand  we 
find  the  paternal  state,  of  which  the  ideal  is  a  benevolent 
despotism  —  on  the  other  we  find  the  modern  socialistic 
or  semi-socialistic  democracy.  This  is  one  of  those  numer- 
ous cases  in  which  the  extremes  meet. 

In  tracing  the  history  of  government  insurance  it  is  no 
surprise  to  find  that  (barring  such  hybrid  forms  as  were 
connected  with  the  guild  system,  and  which  seem  to  carry 
the  origin  of  insurance  back  to  the  thirteenth  century  and 
to  distant  Iceland)  modern  government  insurance  may  be 


396  YALE  READINGS  IN  INSURANCE 

dated  from  the  seventeenth  century,  and  had  its  birth- 
place in  lower  Germany  and  in  Denmark.  Thus  there 
was  at  this  time  a  governmental  insurance  agency  against 
fire  in  Schleswig-Holstein,  and  another  managed  by  the 
city  of  Copenhagen.  In  the  eighteenth  century  similar 
insurance  institutions  arose  in  Brandenburg  on  the  initia- 
tive of  the  Prussian  government.  Thus,  in  1701  and  1705 
several  such  village  insurance  agencies  were  established. 
In  1706  one  was  created  in  Berlin,  and  towards  the  middle 
of  the  eighteenth  century  others  were  established  for  vari- 
ous Prussian  provinces  and  other  German  territories. 

These  agencies  existed  exclusively  for  insuring  houses 
against  fire  and  were  generally  compulsory.  The  object  of 
introducing  them  was  to  prevent  the  impoverishment  of 
whole  villages  by  fire,  and  to  help  rural  credit.  The  con- 
tributions were  generally  made  on  the  principle  of  assess- 
ment, and  it  was  not  often  that  the  risks  were  classified. 
From  this  beginning,  public  fire  insurance,  often  compul- 
sory, has  become  a  common  feature  of  the  administration, 
especially  in  the  states  of  Teutonic  origin  in  central  Europe. 
Thus,  in  1906  there  were  53  public  fire  insurance  offices  in 
the  German  Empire  with  insurance  outstanding  of  63,480,- 
156  marks.*    Similar  offices  are  also  found  in  Austria. 

While  in  most  of  these  cases  the  state  agencies  do  not 
enjoy  any  monopoly,  and  compete  with  private  insurance 
companies,  it  is  a  very  common  thing  to  make  insurance, 
especially  of  houses,  compulsory.  This  is  particularly  the 
case  in  the  southern  German  states,  Bavaria,  Wurtemburg, 
Baden,  also  in  Saxony  and  in  parts  of  Prussia,  particularly 
in  the  cities  of  Berlin,  Stetin,  Breslau,  etc. 

In  Switzerland,  while  the  federal  government  has  the 
general  supervision  of  private  insurance  companies,  it  has 
been  left  to  the  cantons  to  establish  governmental  insurance 
agencies.  In  1898  there  were  seventeen  cantons  in  Switz- 
erland out  of  twenty-five  which  had  cantonal  insurance 
agencies  for  buildings,  and  two  which  extended  the  insur- 

» " Statistisches  Jahrbuch  fur  das  Deutsche  Reich,"  1908,  p.  325. 


GOVERNMENT  INSURANCE  397 

ance  to  furniture.  In  most  of  these  the  institution  is  an 
old  one.  Fourteen  out  of  the  seventeen  were  estabhshed 
before  1820.  The  total  amount  insured  under  both  heads 
was  over  5,907,000,000  fr.  or  about  $1,193,000,000.  In 
many  of  these  cases  insurance  is  obhgatory.^ 

While  government  insurance  seems  to  have  begun  with 
fire  risks,  it  has  recently  been  extended  to  live  stock,  with 
the  special  object  of  securing  peasants  against  loss  through 
epizootics.  The  particular  reason  for  turning  over  this 
kind  of  insurance  to  the  government  lies  in  the  difficulty  of 
estimating  the  risks,  and  of  identifying  the  animals,  which 
die,  as  well  as  in  the  unequal  distribution  of  risks  since 
an  epizootic  by  its  very  nature  tends  to  bunch  the  losses. 
There  is  also  another  advantage  in  making  the  government 
responsible  for  the  losses.  It  is  the  only  agency  capable 
of  enforcing  on  a  large  scale  the  sanitary  regulations  which 
are  necessary  to  minimize  those  losses.  Thus  in  Germany 
the  matter  was  regulated  by  an  imperial  law  of  June  23, 
1880,  amended  May  1,  1894,  which  was  directed  against 
the  spread  of  disease  among  animals.  This  law  left  it  to 
the  individual  states  to  provide  indemnities  for  those  whose 
animals  were  killed,  and  also  to  determine  how  the  indem- 
nity should  be  raised,  and  in  most  of  them,  as  in  Prussia 
under  the  law  of  March  12,  1881,  there  is  a  yearly  tax  upon 
the  owners  of  live  stock  which  amounts  to  a  kind  of  mutual 
insurance  against  epizootics. 

Insurance  against  injury  by  hail  is,  like  the  insurance  of 
cattle,  important  for  the  farmer,  and  similar  reasons  exist 
for  putting  it  under  the  control  of  the  state.  This  has, 
however,  not  been  done  to  any  considerable  extent,  except- 
ing in  Bavaria,  where  a  state  hail  insurance  department  was 
organized  in  1884,  endowed  with  a  guarantee  fund  of 
1,000,000  marks  (about  $250,000),  and  an  annual  subsidy 
of  40,000  marks  ($10,000).  This  department  enjoys,  how- 
ever, no  monopoly;  it  simply  competes  with  private  com- 
panies.    Nor  is  insurance  compulsory. 

1  "Statistisches  Jahrbuch  der  Schweiz,"  1900,  p.  159. 


398  YALE  READINGS  IN  INSURANCE 

Government  insurance  against  old  age  has  been  tried  on 
a  moderate  scale  in  England  as  well  as  in  France.  As  far 
back  as  1771  a  bill  was  introduced  into  the  British  Parlia- 
ment to  provide  for  old  age  insurance,  but  it  was  not  car- 
ried, and  no  positive  action  was  taken  until  1833.  The 
act  passed  in  that  year  permitted  the  purchase  of  annuities, 
either  deferred  or  immediate,  of  not  less  than  £4  or  more 
than  £20  value.  This  was  intended  to  provide  for  a  kind 
of  old  age  pension.  It  was  at  the  time  opposed,  not  only 
by  the  private  insurance  companies,  but  also  by  the  friendly 
societies,  and  it  was  not  until  1864  and  1882  that  further 
acts  were  passed,  making  the  system  efficient.  Under  the 
present  system  immediate  or  deferred  annuities  for  not  less 
than  £1  nor  more  than  £100  can  be  purchased  through  a 
postal  savings  bank  on  the  life  of  any  person  over  five 
years  of  age.  Persons  between  fourteen  and  sixty-five 
cannot  be  insured  for  less  than  £5.  The  cost  varies  with 
the  age.  Thus  a  man  of  twenty-four  can,  by  paying 
annually  4s.  4d.,  purchase  an  annuity  of  £1  to  commence 
when  he  has  reached  his  fifty-fourth  year,  or  he  can  obtain 
the  same  sum  by  the  immediate  payment  of  £3.  19s.  lOd. 
This  system  has  had  comparatively  meager  results. 

In  France  the  bank  for  old  age  pensions  was  established 
in  1850.  Its  benefits  were  similar  to  those  offered  in  Eng- 
land. By  paying  5  fr.,  or  a  multiple  of  this  sum,  one  could 
obtain  after  a  certain  time  a  regular  pension  not  exceeding 
600  fr.  Two  forms  of  insurance  were  provided  —  one  with 
alienated  capital,  the  other  with  reserved  capital.  In  the 
latter  case  the  pension  was  lower,  but,  on  the  other  hand, 
if  the  beneficiary  died  either  before  or  after  the  beginning 
of  the  pension,  all  sums  paid  by  him,  less  the  interest  upon 
them,  were  returned  to  his  heirs.  Some  of  the  details  have 
been  changed  by  subsequent  laws.  The  law  of  1886  fixed 
1200  fr.  as  the  maximum  pension,  and  provided  that  the 
annual  payments  should  not  exceed  100  fr.,  excepting  in 
the  case  of  benefit  societies.  A  law  passed  in  1893  pro- 
vided that  the  maximum  deposited  in  one  year  should 


GOVERNMENT  INSURANCE  399 

be  500  fr.  The  results  of  this  system  have  been  somewhat 
disappointing.  Very  few  workingmen  are  directly  insured 
in  this  establishment.  The  bulk  of  the  insurance  is  taken 
collectively  by  societies  and  employers  for  the  benefit  of 
others.  The  sum  paid  annually  by  individuals  has  shown 
but  a  slight  increase  from  year  to  year  and  has  often  fallen 
off.  Thus  for  the  year  1889  it  was  9,500,000  fr.;  in  the 
year  1905  it  was  8,704,062  fr.,  while  collective  deposits  in 
1905  were  over  43,000,000  fr. 

Of  the  new  individual  depositors  in  1905  numbering  in 
all  8285,  2949  were  minors  without  profession,  1288  were 
persons  who  belonged  to  the  liberal  professions  or  other 
members  of  the  middle  class.  The  workingmen  proper, 
including  domestics,  numbered  only  about  1395.' 

Since  1868  two  other  forms  of  government  insurance 
have  been  introduced  in  France  —  one  for  accidents,  the 
other  for  death,  but  comparatively  little  use  has  been 
made  of  either.  The  total  receipts  of  the  insurance  agency 
against  accidents  in  1905  amounted  to  only  2868  fr.,  paid 
by  474  persons.^  The  use  of  the  life  insurance  bureau  has 
likewise  been  small.  From  1868  to  December  31,  1905, 
only  3565  persons  had  been  individually  insured,  524,257, 
collectively. 

Governmental  life  insurance  has  been  developed  in  recent 
times  in  New  Zealand.  Facilities  for  life  insurance  being 
poor  in  the  early  days  of  the  colony,  it  was  proposed  by 
Sir  Julius  Vogel  that  the  want  should  be  supplied  by  the 
state,  and  a  law  was  accordingly  passed  which  created  a 
life  insurance  department  in  1870.  It  began  on  a  small 
scale  with  but  463  clients.  At  the  end  of  1906  it  had 
45,981  policies  outstanding,  and  did  over  one-third  of  the 
life  insurance  business  of  the  colony.  Of  the  total  insur- 
ance of  $29,036,047,  the  state  insurance  department  had 
placed  $10,667,591.^    It  is  said  that  the  New  Zealand  people 

'  "Annuaire  Statistique  de  la  France,"  1906,  p.  331. 

^Ibid.,  342. 

3  "New  Zealand  Official  Year-Book,"  1908,  p.  533. 


400  YALE  READINGS  IN  INSURANCE 

carry  more  life  insurance  per  capita  than  those  of  any  other 
country,  the  average  amount  for  every  European  inhabi- 
tant of  the  colony  at  the  end  of  1906  being  £31,  19s.  Id., 
or  about  $160.  Accident  insurance  by  the  state  was  intro- 
duced by  an  act  passed  in  1899,  state  fire  insurance  by 
an  act  passed  in  1903.^  In  all  of  these  cases  the  government 
insurance  is  neither  a  monopoly  nor  obligatory,  but  simply 
enters  the  field  in  competition  with  private  corporations 
in  order  to  supply  a  want,  and  it  is  stated  that  state  fire 
insurance,  which  did  not  go  into  operation  until  1905, 
has  reduced  the  rates  by  10  to  33|  per  cent.^ 

Except  for  the  annuity  system  mentioned  above,  Eng- 
land and  the  United  States  have  not  formally  entered  the 
field  proper  of  governmental  insurance.  Yet,  in  our 
marine  hospital  service  we  have  something  closely  allied 
to  government  insurance  under  another  name.  Under  an 
act  of  Congress  passed  in  1798,  sailors  who  fall  sick  or  are 
injured  on  vessels  sailing  under  the  United  States  flag  are 
entitled  to  be  cared  for  at  government  expense,  and  down 
to  1884  were  required  to  submit  to  a  certain  deduction 
from  their  wages,  which  corresponded  roughly  to  an  in- 
surance premium.^ 

This  sketch  of  government  insurance  is  obviously  made 
up  of  fragments.  Different  conditions  have  led  in  some 
countries  to  the  use  of  one  kind,  in  some  countries  to  the 
use  of  another.  In  some  few  cases  insurance  has  been  com- 
pulsory, in  most  cases  it  has  been  voluntary.  Nor  has 
government  insurance  in  any  of  the  instances  cited  been 
carried  out  on  a  sufficiently  large  scale  to  furnish  us  with 
valuable  experiences.  Within  the  past  twenty-five  years 
an  entirely  new  set  of  government  insurance  agencies  has 
entered  the  field.     Beginning  with  Germany,  a  number  of 

>  "New  Zealand  Official  Year-Book,  1908,  p.  681. 

2  Ibid.,  p.  682. 

3  A  full  history  of  the  marine  hospital  service  will  be  found  in  an 
unpublished  mongraph,  written  in  1907  for  the  Carnegie  Institution  of 
Washington  by  Dr.  Alba  M.  Edwards. 


GOVERNMENT  INSURANCE  401 

governments  have  boldly  taken  up  the  subject  of  working- 
men's  insurance.  They  have  given  it  a  compulsory  char- 
acter. They  have  aided  it  by  subventions  from  the 
treasury,  and,  while  they  have  not  in  most  cases  retained 
an  absolute  monopoly  of  the  business  for  themselves,  they 
have  actually  taken  charge  of  the  greater  part  of  it.  More- 
over, as  this  whole  mass  of  legislation  has  come  into  exist- 
ence in  an  age  which  hungers  and  thirsts  for  statistics, 
unusually  complete  records  have  been  preserved  and  pub- 
lished. We,  therefore,  have  an  experience  which  enables 
us  to  test  the  essential  features  of  government  insurance, 
and,  while  the  experience  is  not  long  enough  to  justify  us 
in  reaching  confident  generalizations,  it  does  supply  us 
with  much  instructive  material. 

The  beginning  of  modern  workingmen's  insurance  is  to 
be  found  in  Germany,  This  is  no  mere  accident.  We  have 
seen  how  at  an  early  day  fire  insurance  was  introduced  by 
the  public  authorities,  and  was  made  compulsory  in  that 
country,  and  for  several  centuries  the  German  states  have 
been  preeminently  the  states  of  a  paternally  active  admin- 
istration. There  were  some  special  reasons,  however, 
which  brought  about  the  introduction  of  compulsory 
workingmen's  insurance  in  the  ninth  decade  of  the  nine- 
teenth century. 

(1)  Germany  has  been  the  nursery  of  modern  scientific 
socialism.  For  many  years  after  the  death  of  Lassalle 
and  the  exile  of  Marx,  socialism  partook  largely  of  a  theo- 
retical and  revolutionary  character.  The  formation  of  the 
German  Empire  in  1871,  which  brought  with  it  universal 
suffrage,  also  brought  the  first  socialist  member  of  parlia- 
ment, but  he  sat  alone  in  the  parliament  of  1871.  In  1874 
the  number  had  increased  to  nine,  while  in  1877  there  were 
twelve,  representing  a  constituency  of  493,000.  In  1878 
two  attacks  were  made  upon  the  life  of  the  emperor.  He 
escaped  without  injury  from  the  first;  in  the  second  he 
was  seriously  wounded,  though  he  ultimately  recovered 
and  lived  for  ten  years  longer.     There  was  no  proof  that 


402  YALE  READINGS  IN  INSURANCE 

either  of  the  would-be  regicides  had  any  connection  with 
the  socialist  party.  Indeed,  the  second  one  had  lately 
been  acting  as  colporteur  for  the  Christian  Socialist  Party, 
whose  chief  article  of  faith  was  its  loyalty  to  the  church 
and  to  the  monarchy.  But  Prince  Bismarck  thought  the 
occasion  a  good  one  to  strike  a  blow  at  the  Social  Demo- 
cratic Party,  and,  after  the  dissolution  of  the  parliament 
and  a  new  election,  succeeded  in  carrying  through  in  1878 
a  law  which  gave  to  the  police  the  power  to  suppress  news- 
papers, confiscate  books,  and  close  associations  and  meet- 
ings aiming  at  the  subversion  of  the  state.  In  the  twelve 
years  of  the  existence  of  this  law  2716  prohibitions  were 
issued.  Its  first  effect  was  to  break  up  temporarily  the 
regular  organization  of  the  party,  and  only  nine  socialists 
were  returned  to  parliament  in  1878.  But  in  the  next 
election  their  number  rebounded  to  twelve,  and  in  the 
election  of  1884  it  had  grown  to  twenty-four.  It  was 
clear  that  mere  suppression  was  not  effectual  against 
this  party.  Prince  Bismarck  decided,  therefore,  boldly  to 
take  the  wind  out  of  its  sails  by  introducing  a  series  of 
measures,  calculated  to  do  as  much  for  the  working  classes 
as  the  socialists  themselves  could  have  promised.  There 
was,  therefore,  a  strong  political  motive  for  introducing 
these  measures  at  that  time. 

(2)  This  movement  was  aided  by  the  newer  tendencies 
of  economic  thought  in  Germany.  With  the  formation  of 
the  Empire  came  a  greater  aversion  to  following  in  the  foot- 
steps of  English  economists,  while  the  introduction  of  the 
historical  method  of  research,  not  only  in  law,  but  also  in 
economics,  gave  scholars  a  new  appreciation  of  the  effi- 
ciency of  the  government  in  the  economic  development  of 
Germany.  This  movement  of  thought  is  illustrated  by 
two  votes  passed  by  the  Verein  filr  Sozial  Politik,  which 
had  been  formed  in  1872  in  order  to  discuss  questions 
of  practical  economics,  and  in  which  most  of  the  profes- 
sional economists  of  Germany  were  enrolled.  In  1875  the 
question  of  compulsory  insurance  for  invalidity  and  old 


GOVERNMENT  INSURANCE  403 

age  was  discussed,  and  the  vote  stood  28  to  11  against 
compulsion.  In  1882  a  similar  question  was  again  brought 
up,  and  the  vote  was  in  favor  of  compulsion  for  accident 
and  sick  insurance,  though  against  the  immediate  intro- 
duction of  insurance  for  invalidity  as  well  as  for  widows 
and  orphans.  The  more  advanced  thinkers  among  the 
German  economists  were  moving  steadily  towards  the 
idea  of  compulsory  insurance. 

(3)  Another  reason  for  at  least  insurance  against  acci- 
dents lay  in  the  failure  of  the  employers'  liability  act  of 
June  7,  1871,  and  in  the  feeling  that  industries  should  bear 
the  burden  of  their  own  accidents  without  the  litigation 
and  ill  feeling  connected  with  suits  for  damages. 

The  elaborate  legislation  for  compulsory  insurance  which 
Germany  adopted  was,  therefore,  not  an  isolated  experi- 
ment or  merely  a  shrewd  political  move.  It  grew  natu- 
rally out  of  the  political,  economic  and  social  situation 
which  existed  in  Germany  during  the  decade  following 
the  formation  of  the  Empire,  and  it,  in  turn,  has  stimulated 
a  movement  towards  so-called  socialistic  measures,  which 
has  shown  itself  more  or  less  in  almost  all  of  the  ad- 
vanced industrial  countries  of  the  world  during  the  last 
quarter  of  a  century.  In  no  country,  however,  could  such 
a  radical  and  extensive  scheme  have  been  carried  out  so 
successfully  as  in  Germany,  with  its  corps  of  highly  trained 
officials,  its  habits  of  obedience,  and  the  most  powerful 
figure  of  the  nineteenth  century  for  its  chancellor.  The 
legislation  is  so  extensive  and  so  complicated  that  even  a 
summary  of  its  main  provisions  would  occupy  more  time 
than  is  allotted  to  the  whole  subject.  Fortunately  the 
details  of  the  law  are  easily  accessible,  not  only  in  the  vo- 
luminous German  literature  on  the  subject,  but  also  in  works 
published  in  the  English  language,  and  I  shall,  therefore, 
content  myself  with  bringing  out  the  salient  points  which 
are  characteristic  of  the  governmental  features  of  the  laws.* 

*  See  Fourth  Special  Report  of  the  Commissioner  of  Labor  on  Com- 
pulsory Insurance  in  Germany,  by  John  Graham  Brooks,  Washington, 


404  YALE  READINGS  IN  INSURANCE 

The  first  bill,  providing  for  accident  insurance,  was  sub- 
mitted to  parliament  early  in  1881,  but  was  rejected. 
When  the  House  convened  November  17,  1881,  it  was 
greeted  with  a  message  from  the  emperor  which  created 
a  profound  impression,  and  in  which  he  expressed  his 
desire  to  leave  behind  him  to  the  Fatherland  "new  and 
lasting  pledges  of  its  internal  peace,  and  to  the  needy 
greater  certainty  and  abundance  of  the  assistance  to  which 
they  have  a  claim."  This  message,  which  came  as  a  kind 
of  a  political  testament  of  the  venerable  emperor,  created 
a  strong  presumption  in  favor  of  compulsory  insurance.  A 
new  bill  for  accident  insurance  was  introduced  as  well  as 
a  bill  for  insurance  against  sickness.  The  latter,  which 
was  the  first  to  be  passed,  was  published  June  15,  1883, 
and  went  into  effect  December  1,  1884.  The  accident 
insurance  bill  was  passed  July  6,  1884,  and  went  partially 
into  effect  upon  its  proclamation,  though  it  was  not  put 
fully  into  operation  until  October  1,  1885. 

Both  laws  have  been  repeatedly  amended,  mainly  by 
laws  which  have  extended  or  liberalized  their  provisions, 
but  their  fundamental  principles  have  not  been  altered. 
The  first  formal  bill  for  the  insurance  against  invalidity  and 
old  age  was  brought  before  parliament  in  1888,  and  pub- 
lished as  a  law  July  22,  1889.  The  provisions  with  regard 
to  the  machinery  of  insurance  were  to  go  into  effect  at 
once.  The  beginning  of  its  business  operations  was  left 
to  imperial  ordinance  and  was  finally  set  for  January  1, 
1891. 

Thus  in  less  than  ten  years  the  three-fold  plan  for  caring 

1895;  W.  F.  Willoughby:  "Workingmen's  Insurance,"  1898;  Report  of 
the  Industrial  Commission,  Vol.  XVI.,  pp.  228-241,  Washington,  1901. 
Excellently  compiled  statistics  may  be  found  in  Lass  und  Zahn,  "  Ein- 
richtung  und  Wirkung  der  Deutschen  Arbeiterversicherung,"  1900, 
a  volume  prepared  for  the  Paris  Exposition  of  1900;  "Die  Deutsche 
Arbeiterversicherung;  als  Soziale  Einrichtung,"  1904,  a  volume  pre- 
pared for  the  St.  Louis  World's  Fair  of  1904;  and  in  the  regular  publi- 
cations of  the  Reichsversicherungsamt  and  the  Imperial  Statistical 
Bureau. 


GOVERNMENT  INSURANCE  405 

for  the  working  classes  was  carried  through  and  put  into 
operation. 

I.  The  sick  insurance  law  applies  to  all  cases  of  sickness, 
regardless  of  cause,  and  to  practically  all  persons  employed 
for  wages  in  any  of  the  mechanical  trades  or  in  commerce, 
as  well  as  to  some  of  those  engaged  in  agriculture.  At  the 
end  of  1907  there  were  over  12,000,000  persons  who  were 
subject  to  its  provisions.  It  also  applies  to  ordinary 
laborers  and  even  to  those  occupying  an  official  position 
as  far  as  their  salary  is  less  than  2000  M.  or  about  $500. 
Of  the  occupations  to  which  the  law  applies,  some  are 
unconditionally  subject  to  it,  others  conditionally.  The 
principal  trades  in  which  the  compulsion  is  general  are 
railroading,  mining,  manufactures,  internal  navigation, 
commerce,  the  telegraph  and  postal  service,  navigation  in 
harbors,  etc.,  though  regular  seamen  are  provided  for  by 
a  special  law.  Its  provisions  can,  however,  be  extended 
by  ordinance  to  certain  other  classes.  Exemptions  are 
allowed  for  certain  classes,  such  as  soldiers  and  public 
servants,  whose  office  entitles  them  to  support  in  sickness, 
and  in  some  other  cases  on  special  application.  Voluntary 
insurance  under  this  head  is  also  permitted  to  certain 
classes  of  persons  to  whom  the  compulsory  character  of 
the  law  does  not  apply,  and  those  who  have  passed  out 
of  an  occupation  subject  to  the  law  are  allowed  to  con- 
tinue their  relations  to  the  insurance  agency  in  which  they 
were  inscribed. 

The  organization  of  the  sick  insurance  seems  at  first 
sight  very  complicated,  since  there  are  no  less  than  eight 
different  kinds  of  organizations  which  may  be  within  the 
operation  of  the  law.  The  object  of  this  was  to  adapt 
compulsory  insurance  as  far  as  possible  to  existing  insti- 
tutions, and  to  the  needs  of  different  classes  of  the  people. 
The  following  table  gives  a  summary  of  the  number  and 
membership  of  the  different  classes  of  societies  concerned 
in  1907: 


406 


YALE  READINGS  IN   INSURANCE 


Societies  i 

Members  3 

1.  Local  Sick  Insurance  Agencies 

2.  Establishment  Sick  Insurance  Agencies.  . 

3.  Building  Sick  Insurance  Agencies 

4.  Guild  Sick  Insurance  Agencies 

5.  Registered  Benefit  Societies 

4757 

7914 

41 

761 
1318 

151 
8290 

168^ 

5,915,114 

3,146,386 

15,222 

240,087 

893,330 

36,168 

1,475,489 

7    Municipal  Associations 

8    Miners'  Associations  

806,276^ 

23,400 

12,528,072 

The  benefits  which  are  given  must  come  up  to  a  certain 
minimum,  which  must  supply: 

(1)  Free  medical  attendance  and  medicine  from  the 
day  of  sickness; 

(2)  A  regular  allowance  beginning  with  the  third  day 
after  the  sickness  has  shown  itself. 

As  a  rule  this  sum  is  equal  to  one-half  of  the  rate  of 
wages  upon  which  the  premiums  are  based,  and  it  may  be 
given  for  thirteen  weeks.  A  number  of  variations  are, 
however,  permitted,  such  as  care  in  a  hospital,  which  may 
be  substituted  for  medical  attendance,  allowance,  etc.  The 
funds  are  supplied  normally  by  the  insured  person  and  by 
the  employer  jointly,  the  latter  contributing  one-third 
of  the  premiums,  the  former  two-thirds,  but  the  total 
amount  is  advanced  by  the  employer,  who  indemnifies 
himself  by  deducting  the  quota  of  the  insured  from  his 
wages.  In  general  the  contributions  range  from  IJ  to 
4|  per  cent,  of  the  normal  wages. 

II.  Insurance  against  accidents  covered  from  the  begin- 
ning a  large  number  of  different  people,  and  its  scope  has 

'  Statistik  des  Deutschen  Reichs,  Bd.  194.  Krankenversicherung 
im  Jahre  1907,  p.  1. 

Ubid.,  p.  3. 

3  Vierteljahrshefte  zur  Statistik  des  Deutschen  Reichs,  1909.  Heft 
2,  p.  92. 


GOVERNMENT  INSURANCE  407 

been  considerably  extended  of  late  years,  an  amendment, 
which  was  passed  in  1900,  actually  going  so  far  as  to  include 
convicts  in  prison. 

In  1906  over  21,000,000  persons  were  insured  against 
accident,  or  over  one-third  of  the  entire  population  of  the 
German  Empire.'  They  include,  not  only  industrial  em- 
ployees and  those  engaged  in  railroading  and  internal  navi- 
gation, but  also  those  engaged  in  agriculture,  forestry,  and 
all  kinds  of  building  operations.  The  organization  of  this 
form  of  insurance  is  quite  different  from  that  of  the  sick 
insurance.  It  rests  entirely  upon  so-called  professional  asso- 
ciations, in  which  the  insured  are  grouped  according  to  their 
occupations.  These  associations,  of  which  there  were  114 
in  1906,  are  virtually  unions  of  employers  who  are  leagued 
together  as  far  as  possible  according  to  the  character  of 
their  industry.  In  some  cases  one  association  extends  over 
the  entire  Empire,  as  in  the  case  of  the  Iron  and  Steel 
Association.  In  other  cases  they  cover  but  a  limited 
territory.  Each  one  is,  however,  in  the  main  self-gov- 
erning. It  elects  its  own  officers  and  manages  its  own 
affairs,  subject  to  the  general  provisions  of  the  law.  The 
benefits  given  are  in  general  of  two  kinds: 

(1)  In  the  case  of  injury,  the  benefits  begin  with  the 
fourteenth  week,  inasmuch  as  during  the  first  thirteen 
weeks  the  injured  person  is  cared  for  under  sick  insurance 
or,  failing  that,  at  the  direct  expense  of  his  employer. 
Beginning  with  the  fourteenth  week  he  is  entitled  under 
accident  insurance  to  the  cost  of  medical  attendance, 
medicine,  etc.,  and  to  an  allowance  to  continue  during 
the  period  of  his  disability.  The  amount  of  the  allowance 
is  graded  according  to  the  severity  of  the  injury,  two- 
thirds  of  the  normal  wages  being  usually  given  in  the  case 
of  total  disability. 

(2)  In  the  case  of  death,  the  expenses  of  burial  are  to 
be  paid,  and  an  annuity  given  to  the  widow  until  her  death 
or  remarriage,  or  to  the  children. 

1  " Statistisches  Jahrbuch  fiir  das  Deutsche  Reich,"  1908,  p.  307. 


408  YALE  READINGS  IN   INSURANCE 

The  entire  expense  of  accident  insurance  is  borne  by  the 
employers,  excepting  in  as  far  as  the  injured  person  may 
be  a  contributor  to  a  sick  insurance  fund  on  which  his 
care  during  the  first  thirteen  weeks  rests.  The  funds  are 
raised  according  to  the  assessment  principle,  that  is,  the 
expenses  of  each  year  are  apportioned  among  the  employers 
who  are  subject  to  the  insurance  law.  The  rate  of  appor- 
tionment depends  partly  upon  the  amount  paid  in  salaries 
and  wages,  and  partly  upon  the  risks  of  the  employment. 
There  are,  however,  some  exceptions  to  this  general  rule. 

III.  Insurance  for  invalidity  and  old  age  applies  in 
general  to  persons  engaged  in  agriculture  and  industry, 
in  trade,  domestic  service,  and  public  service.  It  also 
includes  officials,  provided  their  salary  is  not  over  2000 
marks.  Certain  other  persons  may  take  advantage  of  the 
law,  but  without  compulsion,  while  certain  persons  in  the 
enumerated  classes  are  exempt  either  by  law  or  on  their 
own  application.  The  former  exemption  applies  mainly 
to  persons  who  are  entitled  by  virtue  of  their  occupation 
to  a  pension,  the  latter  to  persons  who  are  already  over 
seventy,  or  who  do  not  work  regularly  for  wages.  The 
organization  of  the  insurance  differs  radically  from  that 
of  both  of  the  other  systems.  It  is  in  charge  of  an  imperial 
bureau  which  has  its  subdivisions  scattered  over  the  coun- 
try. For  this  purpose  Germany  is  divided  into  thirty- 
one  districts,  each  with  its  insurance  department.  In 
general  the  place  of  a  person's  occupation  determines  the 
district  in  which  he  is  insured.  It  was  estimated  that  in 
1906  about  14,000,000  persons  enjoyed  the  benefit  of  this 
form  of  insurance.^     The  benefits  are  twofold: 

(1)  An  invalidity  pension  which  is  given  without  regard 
to  age  to  those  whose  earning  capacity  is  reduced  to  less 
than  one-third  of  the  normal. 

(2)  An  old  age  pension  to  which  every  one  over  seventy 
years  of  age  is  entitled  whether  infirm  or  not,  provided  he 
has  complied  with  the  general  conditions  of  the  law. 

» Statistisches  Jahrbuch  fiir  das  Deutsche  Reich,  1908,  p.  318. 


GOVERNMENT  INSURANCE  409 

The  principle  of  these  requirements  is  that  the  appHcant 
must  have  been  a  contributor  to  the  fund  for  an  aggregate 
of  one  thousand  two  hundred  weeks,  or  twenty-four  years. 
The  benefit  consists  in  both  cases  of  a  uniform  contribution 
of  50  marks  (about  $12.50)  per  year  from  the  Empire,  and 
of  an  additional  sum  which  depends  upon  the  wage  class  of 
the  recipient  and  upon  the  length  of  time  during  which 
he  has  contributed.  The  beneficiary  is  entitled  to  have  a 
part  of  his  contributions  refunded  on  certain  conditions: 

(a)  In  the  case  of  women,  one-half  is  refunded  upon 
marriage. 

(6)  In  case  accident  insurance  provides  for  the  insured, 
he  may  likewise  receive  back  one-half. 

(c)  In  case  the  insm^ed  dies  before  the  beginning  of  the 
pension,  the  surviving  wife  or  husband  may  receive  one- 
half  of  the  amount  contributed. 

Excepting  for  the  uniform  subsidy  given  by  the  Empire, 
the  cost  of  the  insurance  is  divided  evenly  between  the 
emploj^er  and  the  employed,  but  is  advanced  by  the  former. 
The  financial  principle  under  which  the  rates  are  fixed 
differs,  however,  from  that  which  applies  to  either  of  the 
other  insurance  systems.  The  premiums  are  based  upon 
the  principle  that  each  one  is  to  contribute  on  the  average 
the  capital  out  of  which  his  own  allowances  are  paid. 
In  the  beginning  this  rate  was  determined  provisionally  for 
a  period  of  ten  years,  but  as  it  was  found  that  the  rates 
were  sufficient  for  the  permanent  requirements  of  the 
system,  they  were  definitely  fixed  by  the  amendment  of 
1899.  As  a  transitional  measure,  it  was  provided  that 
persons  over  forty  years  of  age  when  the  law  went  into 
effect,  if  they  had  been  occupied  in  one  of  the  dutiable 
employments  for  three  years  previous,  should  have  the 
term  normally  fixed  for  their  contributions  shortened  by 
as  many  years  as  their  age  exceeded  the  age  of  foi-ty.  Thus 
a  person  fifty  years  of  age,  instead  of  being  obliged  to 
contribute  for  twenty-four  years,  would  only  be  obliged 
to  contribute  for  fourteen. 


410  YALE  READINGS  IN  INSURANCE 

The  enactment  and  successful  execution  of  the  German 
insurance  laws  led  to  a  rapid  extension  of  the  system  in 
other  parts  of  the  world.  The  first  state  to  follow  the 
German  example  was  Austria,  which  provided  for  com- 
pulsory accident  msurance  in  1887,  for  sick  insurance  in 
1888,  and  for  miners'  insurance  in  1889.  Hungary  pasesd 
a  law  for  sick  insurance  in  1891.  Norway  passed  a  law 
for  accident  insurance  in  1894,  modeled  somewhat  after 
the  German  plan.  Sweden,  after  considerable  discus- 
sion, accepted  in  1901  a  law  according  to  which  the  em- 
ployers must  either  give  compensation  for  accidents,  or 
must  insure  their  employees.  In  1901  Holland  passed  a 
law  providing  for  compulsory  insurance  against  accidents, 
and  even  distant  Iceland  adopted  in  1890  a  scheme  for 
insurance  against  invalidity  and  old  age. 

In  December,  1903,  the  new  Belgian  law  on  accident 
insurance  was  published,  which,  however,  is  more  in  the 
nature  of  workmen's  compensation  than  of  insurance, 
though  it  amounts  in  some  of  its  features  to  an  indirect 
insurance,  and  there  was  a  strong  pressure  in  the  Chamber 
to  give  it  the  character  of  insurance. 

A  number  of  states  which  have  not  formally  adopted  a 
scheme  of  workingmen's  insurance  have  passed  laws  which 
are  intended  to  give  somewhat  similar  benefits.  Thus 
Italy,  in  1898,  passed  a  law  requiring  certain  classes  of 
workingmen  to  be  insured  against  accident  at  the  expense 
of  their  employers.  Workmen's  compensation  acts  were 
adopted  by  Great  Britain  in  1897,  France  in  1898,  Russia 
in  1903,  and  Sweden  in  1904,  under  which  those  who  suffer 
in  industrial  accidents  are  indemnified  by  the  employers. 
Old  age  is  now  being  provided  for  in  some  countries,  not  by 
insurance  but  by  state  pensions,  as  in  Great  Britain  by 
the  act  of  1908  and  in  the  Australian  Commonwealth, 
and  a  number  of  Australian  colonies,  beginning  with  New 
Zealand  in  1898.  In  these  cases  the  funds  are  obtained 
from  the  general  revenue  of  the  government  without 
any  contributions  by  the  beneficiaries.     Even  unemploy- 


GOVERNMENT  INSURANCE  411 

ment  is  now  being  treated  by  insurance,  and  though  most 
of  the  plans  actually  tried,  like  the  so-called  Ghent  Sys- 
tem, are  local,  the  subject  is  being  considered  seriously 
by  a  number  of  states.^  In  the  United  States  the  State 
of  Maryland  adopted  in  1902  a  species  of  accident  insur- 
ance, but  it  was  overthrown  on  constitutional  grounds. 

The  experience  of  Switzerland  with  workingmen's  insur- 
ance has  been  peculiar  and  may  perhaps  in  the  future  prove 
to  be  exceptionally  instructive.  Under  the  Swiss  con- 
stitution, as  originally  adopted,  the  federal  government 
could  do  nothing  in  the  way  of  workingmen's  insurance. 
An  amendment  was  accordingly  adopted  in  1890,  by  a 
popular  vote  of  about  three  to  one,  in  which  it  was  pro- 
vided that  "the  Confederation  shall  by  means  of  legisla- 
tion provide  for  sick  and  accident  insurance,  having  regard 
to  the  existing  sick  clubs.  It  can  make  membership  either 
generally  or  for  special  classes  obligatory."  After  con- 
siderable debate  two  bills  —  one  for  sick  insurance,  the 
other  for  accident  insurance  —  passed  the  federal  legisla- 
ture, but,  upon  a  demand  being  made  for  a  referendum,  a 
vote  was  taken  May  20,  1900,  and  the  whole  plan  was 
rejected  by  337,000  to  147,000  votes,  the  majority  against 
these  specific  bills  being  greater  than  the  majority  of  ten 
years  earlier  in  favor  of  the  general  scheme. 

For  a  number  of  years  the  subject  was  dropped,  but  a 
new  bill  has  now  been  worked  out  by  a  special  commission. 
It  provides  for  sick  and  accident  insurance,  but  it  departs 
widely  from  the  German  model.  Compulsion  is  applied 
only  in  accident  insurance,  and  here  the  insured  may  be 
required  to  bear  one-quarter  of  the  premiums.  Sick 
insurance  is  to  be  promoted  by  a  subsidy  which  the  Con- 
federation may  i)ay  to  voluntary  sick  clubs  and  other 
societies,  and  is  not  made  general  as  in  Germany. 

Some  form  of  workingmen's  insurance  is  now  so  common 

•  For  full  data  see:  "Die  Versicherung  gegen  die  Folgen  der  Arbeits- 
losigkeit  im  Ausland  und  im  Deutschen  Reich.  Bcarbeitet  iin  Kai- 
serlichen  Statistischen  Amt."     Berlin,  190G,  p.  1449. 


412  YALE  READINGS  IN   INSURANCE 

on  the  Continent  of  Europe  that  it  is  the  rule  rather  than 
the  exception.  If  we  look  at  accidents  alone,  more  than 
half  of  the  inhabitants  of  Continental  Europe  west  of 
Russia  live  under  a  system  of  accident  insurance  which 
is  compulsory  for  large  sections  of  the  population. 

With  these  extensions  have,  however,  come  new  prob- 
lems, and  the  pioneer  states  in  this  field  are  now  beginning 
to  revise  their  laws  in  the  light  of  experience.  In  Austria 
a  new  codification  was  proposed  by  the  government, 
November  3,  1908.  The  bill,  in  325  sections  bears  the 
significant  title,  "  Sozialversicherung  "  ^  and  includes  insur- 
ance against  sickness,  old  age  and  invalidity,  and  accidents. 
In  Germany,  a  similar  re-codification  was  proposed,  April 
2,  1909,  under  the  title  "Reichsversicherungsordnung." 
This  bill,  while  it  groups  together  the  three  existing 
branches  of  workingmen's  insurance,  does  not  merge 
them,  as  had  been  proposed,  but  still  retains  for  each 
branch  its  own  system.  It,  however,  extends  the  scope 
of  insurance,  especially  of  sick  insurance  by  including 
in  it  workers  in  agriculture  and  forestry,  domestic  servants 
and  those  engaged  in  domestic  industries.  It  also  pro- 
vides in  connection  with  old  age  insurance  for  a  kind  of 
life  insurance  for  the  families  of  those  who  die.^  In  view 
of  the  changes  which  are  being  proposed  in  the  German 
system,  the  present  time  seems  a  peculiarly  good  one  for 
a  review  of  its  operations  durmg  the  past  quarter  of  a 
century. 

*  Separatbeilage  zu  Nr.  11  der  "Sozialen  Rundschau,"  Wien,  1908. 

2  "Die  sozialpolitische  Bedeutung  der  Reichsversicherungsord- 
nung,"  von  Professor  Dr.  Stier-Somlo  in  "Soziale  Praxis"  for  April 
29,  May  6,  June  3,  1909. 


CHAPTER  XXII 

OPERATION    OF    COMPULSORY    WORKINGMEN'S    INSUR- 
ANCE   IN    GERMANY  * 

It  was  explained  in  the  beginning  that  government  insur- 
ance, which  is  supported  in  whole  or  in  part  by  taxation  or 
by  the  contributions  of  others  than  the  beneficiaries,  is  not 
insurance  in  the  strict  sense  of  the  word.  It  is  an  institu- 
tion which,  while  having  the  form  and  the  immediate  pur- 
poses of  insurance,  partakes,  as  regards  its  ultimate  ends 
and  the  means  by  which  it  is  carried  into  effect,  of  social 
legislation.  This  is  clearly  understood,  in  spite  of  some 
differences  of  opinion,  by  German  authors.  One  of  the 
first  authorities  on  the  purely  legal  side  of  the  institution, 
Professor  Heinrich  Rosin  of  Freiburg,  says  that,  in  spite  of 
the  official  designation,  the  great  workingmen's  insurance 
institutions  cannot  be  properly  classified  as  insurance. 
"We  are  not  dealing,"  he  says,  "with  a  single  two-sided 
legal  relation,  but  with  two  one-sided  relations.  Of  these, 
one,  which  is  the  principal,  provides  for  the  working  classes 
assistance  on  the  part  of  the  state;  the  other,  which  is 
secondary  and  does  not  necessarily  stand  in  legal  connec- 
tion with  the  first,  has  to  do  with  the  raising  of  money  by 
contributions  levied  from  certain  persons."'^ 

While,  therefore,  the  subject  might  be  an  interesting  one 
to  consider  from  the  point  of  view  of  technical  insurance 
questions,  its  chief  interest  lies  in  its  social  operations,  and 

'  By  Henry  W.  Farnam,  Professor  of  Political  Economy  in  Yale 
University.  Reprinted  with  additions  from  pages  304-328  of  the 
"Yale  Insurance  Lectures,  Fire  and  Miscellaneous." 

2  "Das  Recht  des  Arbeiterversicherung,  Vol.  I,  p.  257. 

413 


4U  YALE  READINGS  IN   INSURANCE 

it  is,  therefore,  from  that  point  of  view  alone  that  I  shall 
consider  it.  Partly  for  the  sake  of  simplicity,  and  partly 
on  account  of  the  fulness  of  the  data,  I  shall  confine  my 
analysis  to  the  German  laws,  although  the  indications  are 
that  the  experience  of  Germany  is  repeated  elsewhere  under 
similar  conditions.  In  the  famous  message  of  the  Emperor 
which  has  already  been  referred  to,  we  read  that  "the  cure 
for  social  maladies  is  to  be  found  not  exclusively  in  the  repres- 
sion of  social  democratic  excesses  but  equally  by  means  of  the 
positive  promotion  of  the  welfare  of  laborers.  The  Father- 
land should,  therefore,  receive  new  and  lasting  pledges  of 
its  inner  peace,  and  those  who  are  in  need  should  receive 
greater  certainty  and  abundance  of  help."  Similarly  in 
the  preamble  to  the  law  for  accident  insurance,  which  was 
presented  to  the  parliament  in  1881,  it  is  stated:  "That  the 
state  should  consider  its  needy  members  more  than  hitherto 
is  not  only  a  duty  of  humanity  and  of  Christianity  which 
should  permeate  such  institutions,  but  is  also  a  duty  of 
state  preserving  policy  which  is  to  follow  the  aim  of  culti- 
vating among  the  non-property-owning  classes  of  the  popu- 
lation, who  are  at  the  same  time  the  most  numerous  and 
the  least  educated,  the  view  that  the  state  is  not  only  a 
necessary  but  also  a  beneficial  institution.  To  this  end 
they  must  be  brought,  by  means  of  directly  recognizable 
advantages  which  are  given  them  by  legislative  measures, 
to  conceive  of  the  state  not  only  as  an  institution  invented 
for  the  protection  of  the  better  situated  classes  of  society, 
but  also  as  one  which  serves  their  needs  and  interests." 
The  present  Emperor  expressed  himself  in  similar  terms  in 
1888,  when  the  bill  for  mvalidity  and  old  age  insm-ance 
was  presented. 

Every  attempt  to  influence  the  structure  of  society  or 
the  distribution  of  wealth  by  legislation  is  like  a  surgical 
operation.  As  soon  as  the  knife  is  applied,  it  is  liable  to 
produce  results  different  from  those  which  were  contem- 
plated, and  sometimes  decidedly  antagonistic  to  them.  In 
endeavoring  to  analyze  the  operation  of  this  legislation, 


WORKINGMEN'S  INSURANCE  IN  GERMANY      415 

therefore,  I  shall  distinguish  the  direct  and  intended  results, 
from  those  which  are  mcidental  and  indirect,  and  I  shall 
furthermore  distinguish  the  strictly  financial  and  economic 
results  which  are,  as  it  were,  but  a  means  to  an  end,  from 
the  social  results  which  are  the  real  and  ultimate  purpose 
of  the  legislation. 

At  the  time  of  the  Paris  Exposition  of  1900  the  German 
Government  sent  as  a  part  of  its  exhibit  a  huge,  gilded 
obelisk  some  forty-five  feet  in  height,  which  was  intended 
to  represent  gold  of  the  value  of  the  total  amounts  paid  to 
the  beneficiaries  of  the  insurance  laws  from  1885  to  1899. 
This  would  have  weighed  960,000  kilograms,  and  repre- 
sented a  value  of  2.4  milliards  marks,  or  about  $600,000,000. 
That  sum  has  now  more  than  doubled.  The  total  amount 
paid  out  for  indemnities  down  to  1906  amounted  to  5,682,- 
000,000  marks  or  about  $1,420,500,000.  The  total  income 
during  that  period  was  over  8,000,000,000  marks  and  of 
this  sum  3,645,000,000  came  from  the  employers,  3,282-, 
000,000  from  the  insured,  435,000,000  from  the  Emphe  and 
748,000,000  from  interest  and  premiums.' 

It  is  clear,  therefore,  that  through  this  elaborate  organi- 
zation the  government  has  succeeded  not  only  in  turning  a 
stream  of  wealth,  enormous  in  the  aggregate,  into  the 
pockets  of  the  working  classes,  but  in  drawing  this  stream 
in  about  equal  portions  from  the  employers  and  the 
beneficiaries  themselves. 

It  has  done  this  at  a  cost  which  is  on  the  whole  not 
excessive.  The  total  cost  of  administration  during  the 
period  from  1885  to  1897  was  but  10.1  per  cent,  of  the  total 
expenditure,  and  the  tendency  is  downward.  The  total 
cost  down  to  1906  was  about  9.1  per  cent.  In  sick  insur- 
ance alone  the  cost  of  management  was  5  per  cent,  in 
1904,  4.7  per  cent,  in  1907.2 

It  might,  perhaps,  be  supposed,  and  there  are  some  econ- 
omists who  would  consider  this  a  necessary  deduction  from 

*  "  Statistisches  Jahrbuch  fiir  das  Deutsche  Reich,"  1908,  p.  318. 
^"Statistik  des  Deutschen  Reichs,"  Bd.  177  and  194. 


416 


YALE  READINGS  IN  INSURANCE 


the  wage-fund  theory,  that  the  rate  of  wages  would  have 
fallen  during  the  same  period  on  account  of  the  burdens 
resting  upon  the  employers,  or,  if  not,  that  German  industry 
would  at  least  have  suffered  a  severe  blow.  Neither  of 
these  results  appears  to  have  taken  place.  The  period 
covered  by  insurance  has  been  on  the  whole  a  period  of 
great  prosperity  for  German  industry.  It  has  not  pre- 
vented the  growth  of  large  establishments,  as  is  shown  by 
the  following  table: 


Establishments 

Persons 

Increase  or 
Decrease 

1882 

1895 

1882 

1895 

Estab. 

Pers. 

Independent 

workers 

Small    estab- 

1,430,465 

1,237,349 

1,430,465 

1,237,349 

-13.5 

-13.5 

lishments 

(2-5  persons) 
Medium    estab- 

745,392 

752,223 

1,839,939 

1,953,776 

+  0.9 

+  6.2 

lishments  (6- 

50  persons)   . 
Large  establish- 

85,001 

139,459 

1,109,128 

1,902,049 

+  64.1 

+  71.5 

ments     (over 

50  persons) .  . 

9,481 

17,941 

1,554,131 

2,907,329 

+  89.3 

+  87.2 

2,270,339 

2,146,972 

5,933,663 

8,000,503 

-  5.4 

+  34.8 

International  trade  has  progressed  at  such  a  rapid  rate 
as  to  put  Germany  in  the  second  rank  among  the  great 
states  of  the  world.  The  total  foreign  trade  of  Germany, 
exports  and  imports,  increased  from  8,000,000,000  marks 
in  1890^  to  17,000,000,000  marks  in  1907.'  Looking  at 
the  percentage  of  the  total  trade  of  the  world  which  she 
enjoyed,  we  find  that  she  passed  from  the  third  to  the 
second  place  as  shown  by  the  following  table: 

1  "Statistisches  Jahrbuch  fur  das  Deutsche  Reich,"  1908,  p.  60.* 

2  "Ibid,  1908,  p.  67.* 


WORKINGMEN'S  INSURANCE  IN  GERMANY       417 


1890 

1900 

1906 

Germany 

11.1 

11.3 

20.8 

9.4 

12.1 
10.0 
19.5 
10.3 

12  4 

France 

8  9 

Great  Britian 

17  4 

United  States 

10  0 

Of  the  four  countries  in  question,  Germany  showed  the 
most  rapid  rate  of  increase  in  her  foreign  trade.  The 
ratio  of  gi'owth  in  her  case  was  107.4  per  cent.,  in  the  case 
of  the  United  States  101.5  per  cent. 

Wages  appear  to  have  risen  during  this  period.  But 
German  wage  statistics  are  not  very  satisfactory,  as  there 
are  no  general  figures  systematically  collected  for  the 
whole  empire.^  Some  of  the  trade  unions  have  published 
figures  for  the  wages  of  their  members.  The  accident 
and  sick  insurance  associations  have  tables  of  normal 
wages  on  which  to  base  the  indemnities.  Special  statis- 
tics have  also  been  compiled  for  the  wages  of  city  employees 
and  for  other  groups  of  workers.  In  all  of  these  the  up- 
ward tendency  is  so  marked,  that  we  are  safe  in  saying 
that  money  wages  have  risen,  even  though  we  may  not 
be  able  to  express  the  rise  in  a  percentage  or  to  correlate 
accurately  the  rise  of  the  wages  with  the  rise  of  prices. 

The  general  well-being  is  also  indicated  by  the  per  capita 
increase  in  the  consumption  of  commodities  used  by  the 
masses.  The  per  capita  consumption  of  sugar  increased 
from  an  annual  average  of  6  kilograms  during  the  five  years 
1871-1875  to  16.8  in  1906-1907;  the  consumption  of 
coffee  rose  in  the  same  periods  from  2.27  kilograms   to 


1  On  the  general  subject  of  wage  statistics  see  "  Die  Lohnstatistik 
in  Deutschland," Reichsarbeitsblatt,  February,  1909,  pages  104-109.  The 
statistics  for  a  number  of  trades  are  reprinted  in  "Third  Abstract  of 
Foreign  Labor  Statistics,"  issued  by  the  British  Labor  Department, 
1906.  See  also  Kuczynski:  "Die  Entwicklung  der  gewerblichen  Lohne- 
seit  der  Begrundung  des  Deutschen  Reichs,"  1909. 


418  YALE  READINGS  IN  INSURANCE 

3.02;  rice  from  1.55  to  2.51. »  The  difficulty  of  getting 
domestic  servants,  the  migration  of  people  into  the  cities, 
and  the  consequent  scarcity  of  farm  laborers,  the  falling 
off  of  emigration  from  2.16  per  thousand  of  the  popula- 
tion in  1888  to  .51  per  thousand  in  1907  are  all  indirect 
evidences  of  an  increasing  prosperity  of  the  wage-receiv- 
ing classes.^ 

Besides  the  direct  transfer  of  wealth  which  was  intended 
by  the  insurance  laws,  there  has  been  incidently  a  great 
accumulation  of  capital.  A  report  published  by  the 
Imperial  Insurance  Office,  and  carrying  the  figures  down 
to  December  31,  1903,  shows  that  in  the  single  year  1903 
the  capital  invested  by  the  insurance  offices  in  various 
public  works  was  not  less  than  42,825,599  marks,  or  over 
$10,000,000,  while  the  entire  sum  thus  applied  since  1884 
was  336,851,529  marks,  or  about  $84,000,000,  and  this 
only  represents  a  part  of  the  entire  capital  of  the  insurance 
bureaus. 

The  purposes  to  which  this  capital  has  been  applied  are 
extremely  varied.  Thus  not  less  than  67,000,000  marks 
(about  $17,000,000)  were  put  into  farm  loans,  narrow- 
gauge  railroads,  the  improvement  of  highways,  the  im- 
provement of  live  stock,  etc.  Some  148,000,000  marks 
($37,000,000)  were  used  for  building  hospitals  and  other 
institutions  for  the  sick  or  the  poor,  etc.  A  very  large 
sum  was  used  for  workingmen's  dwellings  —  no  less  than 
118,000,000  marks  ($29,000,000)  being  used  for  this  pur- 
pose.^ The  total  property  of  the  three  groups  of  insur- 
ance agencies  in  1906  was  1,854,000,000  marks  or  about 
$463,500,000." 

Great  improvements  have  also  been  made  in  the  intro- 
duction of  safety  appliances  and  sanitary  measures.     Thus 

1  "Statistisches  Jahrbuch  fur  das  Deutche  Reich,"  1908,  pages  247 
and  251. 

2  Ibid.,  p.  25. 

3  Summary  in  "Soziale  Praxis,"  February  19,  1904,  p.  548. 
^  Ibid.,  p.  318. 


WORKINGMEN'S  INSURANCE  IN  GERMANY      419 

accident  stations  have  been  established  in  Berhn  by 
the  accident  insurance  associations  to  minimize  the  cost  of 
accidents  which  has  to  be  borne  by  the  employers.  These 
places  are  equipped  with  bandages,  splints,  and  other 
surgical  appliances,  and  have  physicians  on  call,  both 
for  day  and  night  service.  The  manufacturers'  associa- 
tions have  taken  pains  to  introduce  strict  rules  with  regard 
to  the  handling  of  dangerous  goods,  the  introduction  of 
life-saving  apparatus,  etc.  Safety  elevators  are  more  gen- 
erally provided  than  formerly,  the  oiling  of  machinery  is 
being  done  automatically  instead  of  by  hand,  the  belting 
is  being  adjusted  by  means  of  a  handle,  machinery  is 
being  fenced  in,  and  premiums  are  sometimes  paid  for 
the  rescue  of  the  injured.  In  order  to  secure  the  execu- 
tion of  these  regulations  some  associations  have  established 
a  regular  inspection  service. 

While  accident  insurance  has  provided  safety  appliances, 
sick  insurance  has  promoted  hygienic  regulations.  In 
Munich  one  of  the  local  sick  insurance  bureaus  has  induced 
the  storekeepers  to  give  their  employees  means  for  sittmg 
down,  a  noon  day  rest,  and  other  advantages.  Lectures 
on  hygiene  have  been  given  in  a  number  of  cities,  partic- 
ularly regarding  tuberculosis,  dust  diseases,  etc.  The 
death-rate  has  fallen  steadily  in  Germany.  In  1885  it 
was  27.2  per  thousand,  in  1907  it  was  18.98  per  cent.'  In 
the  three  charity  clinics  of  Berlin  the  mortality  due  to 
consumption  fell  from  fifty-four  in  1889-1890  to  thirty- 
four  in  1898-1899. 

Let  us  now  turn  from  these  physical  facts  to  the  polit- 
ical and  social  changes  which  have  taken  place  in  Germany 
since  compulsory  insurance  went  into  operation.  It  was 
clearly  stated  at  the  beginning  that  the  object  of  the  insur- 
ance laws  was  to  counteract  the  dangerous  tendencies  of 
the  social  democrats,  and  to  preserve  inner  peace,  by  which 
was  probably  meant  industrial  peace.  And  it  was  also 
expected,  though  this  was  not  so  clearly  brought  out,  that 

*  "  Vierteljahrshef ten  zur  Statistik  des  Deutschen  Reichs,"  1908. 


420 


YALE  READINGS  IN   INSURANCE 


insurance  would  be  substituted  for  and  thus  ease  the  burden 
of  poor  relief.     Let  us  consider  these  points  one  by  one. 

(1)  The  political  effect  on  the  growth  of  the  social 
democratic  party. 

This  matter  can  be  dealt  with  by  a  very  simple  table 
showing  the  results  of  successive  parliamentary  elections 
from  1871  down  to  the  present: 


Socialist 

Socialist 

Voters 

Members  of 
Reichstag 

Voters 

Members  of 
Reichstag 

1871  .... 
1874  .... 

1877  .... 

1878  .... 
1881  .... 
1884  .... 

101,927 
351,670 
493,447 
437,158 
311,961 
549,990 

1 

9 

12 

9 

12 

24 

1887.... 
1890. . .  . 
1893.... 
1898.... 
1903.... 
1907.... 

763,128 
1,427,298 
1,786,738 
2,105,-305 
3,010,472 
3,259,000 

11 

35 
44 
56 
81 
43 

This  table  shows  that  from  1881  to  1903  the  number  of 
socialist  representatives  increased  from  twelve  to  eighty- 
one,  nearly  sevenfold,  and  that  though  there  was  a  great 
drop  in  their  numbers  in  1907  their  constituency  showed 
a  gain.  As  a  means  of  suppressing  socialism,  insurance 
laws  can  hardly  be  considered  a  success.  It  is  true  that 
there  has  been  a  considerable  change  in  the  character  of 
the  party.  It  is  less  than  it  formerly  was  a  party  of  revo- 
lution, it  has  even  ceased  to  be  a  party  of  opposition  pure 
and  simple,  and  in  some  of  the  more  recent  amendments 
to  the  insurance  laws  it  has  at  least  negatively  favored 
the  government  measures.  How  far  this  is  due  to  the 
sobering  effect  of  that  responsibility  which  comes  with 
numbers,  how  far  it  is  due  to  a  change  in  the  theoretical 
views  of  the  younger  socialists,  how  far  it  is  due  to  an  actual 
feeling  of  friendliness  towards  the  existing  parties,  it  is 
impossible  to  say,  and  any  discussion  of  this  matter  would 
carry  us  beyond  the  limits  of  our  subject.     The  fact  re- 


WORKINGMEN'S  INSURANCE  IN  GERMANY      421 

mains  that  the  social  democratic  party  is  still  the  party  of 
discontent,  and  that  its  membership  has  grown  very  rapidly 
in  spite  of  what  compulsory  insurance  has  done  for  its 
working  class  members. 

(2)   Social  Peace. 

A  good  deal  of  stress  is  laid  in  the  official  history  of  the 
insurance  laws  upon  their  conciliatory  effect  in  creating  a 
better  feeling  between  employers  and  employed.  Officially 
the  conditions  are  described  as  almost  idyllic.  "With  the 
improvements  in  the  material  and  social  position  of  the 
workingmen  which  have  been  introduced  through  working- 
men's  insurance  there  is  a  spontaneous  increase  in  their 
pleasure  in  work,  and  at  the  same  time  in  the  quality  and 
amount  of  their  product.  Therefore  the  employers  are  in 
general  quite  willing  to  bear  the  heavy  burdens  in  money 
and  voluntary  service."^  We  are  told  that,  in  addition 
to  the  burdens  of  insurance  placed  upon  them  by  law, 
many  employers  have  voluntarily  introduced  additional 
benefit  features  for  their  employees.  Thus  in  1898,  103 
joint  stock  companies,  90  private  employers  and  48  other 
persons  spent  27,000,000  marks  for  the  benefit  of  their 
employees,  while  in  1899  the  amount  contributed  by  625 
joint  stock  companies  and  349  private  persons  reached 
the  sum  of  39,000,000  marks.^  Individual  examples,  such 
as  are  found  in  the  establishment  of  the  General  Electrical 
Company  of  Berlin,  in  the  famous  steel  works  of  Krupp 
in  Essen,  etc.,  are  not  unfamiliar  to  readers  in  this  country. 
"This  social  activity,"  we  are  told,  "which  the  employers 
are  unfolding  under  the  standard  of  our  new  social  legis- 
lation, cannot  fail  in  the  long  run  to  produce  a  conciliatory 
reaction  upon  the  differences  existing  between  employer 
and  employed.  A  mutual  understanding  is  also  furthered 
by  the  common  consultations  and  meetings  in  which  the 
workingmen's  insurance  unites  employer  and  employed."^ 
It  is  difficult  either  to  prove  or  disapprove  a  general  state- 

>  "Lass  und  Zahn,"  p.  223.  =  Ibid.,  p.  224. 

3  Ibid.,  p.  225. 


422  YALE  READINGS  IN  INSURANCE 

ment  of  this  kind,  but  there  are  some  facts  which  seem  at 
least  to  cast  doubt  upon  the  conclusions  just  quoted.  That 
the  employers  have  done  a  great  deal  for  their  employees 
in  Germany  is  undoubtedly  true;  that  this  activity  is  due 
to  any  large  extent  to  the  insurance  laws  may  well  be  ques- 
tioned. It  is  certainly  a  fact  that  Krupp  voluntarily  intro- 
duced vast  schemes  for  the  welfare  and  insurance  of  his 
men  long  before  government  insurance  was  thought  of.  It 
is  likewise  true  that  in  other  countries  such  as  England, 
France,  and  the  United  States,  where  no  such  insurance 
exists,  brilliant  examples  of  this  far-sighted  interest  in  the 
workers  on  the  part  of  large  corporations  and  large  indi- 
vidual employers  can  be  found.  In  our  own  country,  for 
instance,  the  Colorado  Fuel  and  Iron  Company  has  estab- 
lished a  regular  sociological  department  which  publishes  a 
weekly  magazine  and  superintends  very  extensive  educa- 
tional and  social  advantages  provided  for  the  people  on 
the  company's  pay-roll.  It  would,  therefore,  be  a  mistake 
to  attribute  this  exhibition  of  social  activity  entirely  or  in 
large  degree  to  the  compulsory  insurance  laws.  It  would 
also  seem  as  if  the  statement  regarding  the  good  will 
existing  between  employers  and  employed  in  Germany 
was  hardly  borne  out  by  the  few  statistics  which  are 
available  for  this  purpose.  Generally  speaking,  it  is  true 
that  sentiments  cannot  be  measured  by  the  statistical 
method,  but  when  sentiments  take  shape  in  action,  the 
actions  can  be  counted  and  furnish  at  least  a  rough  index 
of  the  prevalence  of  the  sentiments.  Any  ill  feeling  be- 
tween employers  and  employed  is  in  modern  times  pretty 
sure  to  result  sooner  or  later  in  strikes,  and  strike  statistics 
have  been  collected  with  more  or  less  regularity  in  Germany 
since  about  1890.  In  1889,  shortly  after  the  new  laws  had 
gone  into  effect,  there  occurred  a  notable  strike  among  the 
miners  of  Western  Germany,  in  wliich  it  is  said  that  about 
90,000  persons  took  part.  In  1891-1892  there  was  a  very 
general  and  disastrous  strike  of  the  printers,  which  ulti- 
mately led  to  a  complete  change  in  the  character  of  the 


WORKINGMEN'S  INSURANCE  IN  GERMANY       423 

principal  printers'  union.  Tiiis  union  had  previously  been 
noted  for  its  conservative  and  peaceful  character,  but  has 
now  become  almost  entirely  identified  with  social  democ- 
racy. Another  great  strike  was  that  of  the  Hamburg 
dock  laborers  in  1896-1897,  in  which  over  16,000  persons 
took  part.  A  significant  fact  is  that  in  1897  a  special 
insurance  company  called  "Industria"  was  formed  with 
a  capital  of  5,000,000  marks,  with  the  special  province  of 
indemnifying  employers  for  losses  through  strikes,  and 
though  it  failed  subsequently,  its  failure  was  by  no  means 
due  to  the  disappearance  of  strikes  from  the  industrial 
world.  The  following  table,  which  is  not  altogether  uni- 
form and  therefore  not  very  satisfactory,  indicates  that 
strikes  still  have  their  ups  and  downs,  and  that  the  tendency 
throughout  the  years  seems  to  be  more  upward  than  down- 
ward: ^ 


Strike  Statistics 


Prussia 

German  Empire 

Strikes 

Strikers 

Strikes 

Strikers 

Summer  of  1890 

216 

.     28,643 

Winter     "    1890-1  .... 

71 

6,573 

Summer  "    1891 

118 

25,100 

Winter     "    1891-2.    .. 

99 

7,787 

Summer  "    1892 

99 

7,878 

Winter     "    1892-3.... 

116 

55,882 

Summer  "    1893 

74 

4,070 

Winter     "    1893-4  .... 

48 

2,835 

Summer  "    1894 

127 

9,704 

Winter     "    1894-5 .... 

71 

3,861 

>  The  figures  for  Prussia  down  to  1897  are  taken  from  "Handwor- 
terbuch  der  Staats-Wissenschaften,"  2d  ed..  Vol.  I,  p.  761;  the  later 
figures  are  compiled  from  "Statistik  des  Deutschen  Reichs,"  Vols. 
CXXXIV,  CXLI,  CXLVIII,  CLVII,  CLXIV,  CLXXI,  CLXXVIII, 
CLXXXVIII.  The  figures  for  Prussia  give  the  data  for  strikes  ended 
in  each  year;  in  the  case  of  the  Empire,  the  column  of  strikes  gives 
those  begun,  the  column  of  strikers  refers  to  strikes  ended  in  each  year. 


424 


YALE  READINGS  IN  INSURANCE 


Strike  Statistics  —  Continued 


Summer 

Winter 

Summer 

Winter 

Summer 

Year  1899 

"      1900 

"      1901 

"      1902 

"      1903 

"      1904 

"      1905 

"      1906 

"      1907 


1895.. 
1895-6 
1896.. 
1896-7 
1897.., 


Prussia 


Strikes 


189 

606 

304 

158 

285 

807 

929 

632 

614 

841 

1,190 

1,401 

1,893 

1,204 


Strikers 


6,365 

17,349 

51,309 

16,181 

25,398 

58,931 

82,510 

36,114 

33,997 

51,633 

70,146 

338,675 

152,045 

108,332 


German  Empire 


Strikes 


1,336 
1,462 
1,071 
1,084 
1,405 
1,908 
2,448 
3,378 
2,279 


Strikers 


99,338 

122,803 

55,262 

53,912 

85,603 

113,480 

408,145 

272,218 

192,430 


(3)   The  effect  upon  poor  relief. 

While  it  was  not  announced  as  one  of  the  objects  of  gov- 
ernment insurance  to  diminish  the  amount  spent  on  the 
poor,  it  was  undoubtedly  expected  that  its  effect  would  be 
to  lessen  the  number  of  paupers.  Investigations  made 
into  the  causes  of  poverty  in  Germany  some  years  ago, 
some  of  which  were  made  by  Dr.  Victor  Boehmert  and 
others  by  the  Imperial  Statistical  Bureau,  concur  in  show- 
ing that  in  the  aggregate  some  75  per  cent,  of  the  cases  of 
pauperism  were  attributed  to  siclmess,  accident,  physical 
incapacity,  old  age,  or  death  of  the  bread-winner.  Now  it 
so  happens  that  all  of  these  causes  of  pauperism  are  pro- 
vided for  in  workmgmen's  insurance,  and  if  the  great  mass 
of  wage  workers,  who  are  the  ones  most  liable  on  account 
of  their  small  incomes  to  become  dependent,  are  forced  to 
insm-e  themselves,  and  reap  the  benefit  of  the  contribu- 
tions of  their  employers,  it  would  seem  natural  to  expect 
that  fewer  would  become  dependent,  and  that  gradually 


WORKINGMEN'S  INSURANCE  IN  GERMANY      425 

insurance  would  take  the  place  of  poor  relief  for  all  but 
the  worthless  or  those  who  are  peculiarly  unfortunate. 
This  expectation  seems  the  more  natural,  when  we  con- 
sider the  figures  in  more  detail.  Unfortunately  we  have 
no  general  statistics  giving  the  cost  of  poor  relief  since 
the  investigation  of  1885,  and  it  is  doubtful  if  we  should 
place  implicit  reliance  upon  the  figures  gathered  at  that 
time.  Yet,  as  we  have  no  others,  they  may  at  least  furnish 
us  a  rough  means  of  comparison.  The  number  of  paupers 
enumerated  in  the  German  Empire  in  that  year  was 
1,592,386,  and  the  amount  spent  upon  them  was  about 
90,000,000  marks,  which  gave  an  average  expenditure 
for  every  one  hundred  inhabitants  of  193  marks.  In 
1897  the  total  amount  spent  on  benefits  of  all  kinds  under 
compulsory  insurance  was  256,000,000  marks,  which,  with 
the  increased  population,  gave  an  expenditure  for  every 
one  hundred  inhabitants  of  about  474  marks,  or  about  two 
and  one-half  times  the  average  expenditure  on  poor  relief 
in  1885.  This  did  not  include  the  expenses  of  adminis- 
tration, but  only  the  amount  directly  spent  on  the  bene- 
ficiaries. So  large  an  expenditure  of  money  upon  the  very 
classes  who  are  most  liable  to  become  dependent  might 
be  reasonably  expected  almost  to  abolish  pauperism,  since 
there  must  be  many  cases  in  which  individual  members 
of  a  family  could  now  be  supported  with  the  rest,  when 
they  previously  were  thrown  upon  the  public.  That  the 
question  has  interested  the  authorities  is  seen  in  the  fact 
that  the  Verein  fiir  Armenpflege  has  twice,  namely  in  1895 
and  in  1901,  taken  the  matter  up  for  investigation  and 
discussion,  and  that  the  Imperial  Statistical  Bureau  under- 
took in  1894  and  published  in  1897  an  elaborate  investiga- 
tion into  the  whole  subject.  It  obtained  its  material 
mainly  in  the  form  of  answers  to  the  following  three  specific 
questions,  which  it  addressed  to  the  officials  in  charge  of 
poor  relief  throughout  Germany: 

A.   Has  the  care  of  the  poor  been  relieved  by  workingmen's 
insurance? 


426  YALE  READINGS  IN  INSURANCE 

(a)  Through  sick  insurance? 

(b)  Through  accident  insurance? 

(c)  Through  old  age  and  invahdity  insurance? 

B.  Has  the  number  of  those  supported  and  the  amount 

spent  upon  them  since  the  introduction  of  tlie  several 
insurance  laws  not  diminished,  and  to  what  is  this  to 
be  attributed? 

C.  Has  the  care  of  the  poor  in  numerous  cases  been  made 

supplementary  to  the  benefits  of  workingmen's  insur- 
ance and  provisionally  substituted  for  them? 
The  answers  received  were  not  complete,  and  it  was  not 
possible  statistically  to  prove  either  an  increase  or  a  de- 
crease in  the  total  amount  spent  upon  the  poor  throughout 
the  Empire.  I  have,  however,  tried  to  analyze  the  returns 
as  far  as  possible,  and  compared  my  analysis  with  the  gen- 
eralizations published  by  the  Bureau.  As  regards  the  first 
question,  subdivided  into  three  heads,  which  asks  whether 
the  care  of  the  poor  has  been  relieved  by  workingmen's 
insurance,  the  official  summary  says  "that  by  far  the 
greater  part"  of  the  authorities  questioned  say  that  it 
has  been  relieved.  A  careful  count  shows  that  of  the  total 
number  of  answers,  just  44  per  cent,  give  a  simple  affirma- 
tive, while  19  per  cent,  more  give  a  more  or  less  qualified 
affirmative  answer.  Yet,  when  we  come  to  ask  whether 
there  has  been  a  diminution  either  in  the  number  of  paupers 
or  in  the  amount  spent  for  them,  it  appears  that  58  per 
cent,  state  that  there  has  been  no  such  diminution.  In 
other  words,  it  would  appear  that  in  a  good  many  cases 
those  who  say  that  the  burden  of  poor  relief  has  been 
lessened,  mean,  not  that  it  is  absolutely  less  than  it  for- 
merly was,  but  that  it  would  have  been  increased  much 
more,  if  it  had  not  been  for  workingmen's  insurance.  When 
we  consider  that  the  period  under  consideration  has  been  a 
period  of  industrial  prosperity,  commercial  expansion,  ex- 
ternal peace  and  rising  wages,  we  should  naturally  expect 
that  the  burden  of  poor  relief  would  tend  downwards,  as 
it  has  been  tending  in  England,  and  as  out-door  relief  has 


WORKINGMEN'S  INSURANCE  IN  GERMANY      427 

been  tending  in  many  of  our  American  cities  under  good 
administration.  If  there  are  no  general  economic  reasons 
for  an  increase  in  the  needs  of  the  poorer  classes  in  Germany, 
it  would  seem  as  if  there  must  be  a  social  or  psychological 
reason,  and  there  are  certainly  strong  indications  of  this. 
While  some  officials  speak  of  depression  in  particular  trades, 
the  migration  of  workers  to  the  cities,  etc.,  as  causes  of  the 
increased  expenditure,  others  speak  of  the  tendency  of 
the  poor  to  demand  more.  A  report  from  Gothasays  that 
the  poor  have  become  accustomed  to  demand  help  from  the 
public.  It  is  stated  that  the  shrinking  from  the  eleemosy- 
nary character  of  the  poor  relief  is  ''disappearing  among 
the  needy,  so  that  those  who  are  not  insured  demand 
public  support  more  frequently  than  formerly,  and  refuse 
private  aid.  Then  again,  those  who  are  not  insured,  seeing 
the  amounts  which  are  paid  to  those  who  are  insured, 
demand  a  more  ample  allowance  from  the  poor  law  authori- 
ties, and  not  infrequently  get  it."  It  also  happens  here 
and  there  that,  when  people  have  been  refused  a  demand 
for  an  allowance  under  the  insurance  law  for  lack  of  proof, 
they  go  to  the  poor  law  authorities  and  demand  a  larger 
sum  on  account  of  their  presumptive  demand  for  an  allow- 
ance.^ In  a  report  made  to  the  Verein  fiir  Ai'menpflege 
und  Wohlthatigkeit  by  Wilhelm  Helling  in  1901  we  learn 
some  facts  which  seem  to  indicate  that  insurance  is  not 
having  the  educational  effect  upon  thrift  that  was  expected. 
"It  is  unfortunate,"  he  says,  "to  be  obliged  to  say  that 
persons  who  have  established  a  contingent  claim  ui:)on  the 
benefits  of  insurance  by  contributions  find  it  so  difficult  to 
make  up  their  minds  to  maintain  this  claim  by  the  pay- 
ment of  small  voluntary  sums,  and  also  that  hardly  any 
use  has  been  made  of  the  right  of  optional  insurance.  .  .  . 
It  is  positively  terrible  to  notice  the  number  of  women  who, 
when  they  marry,  give  up  the  rights,  which  they  have 
earned,  in  oi'der  to  obtain  possession  of  a  comparatively  small 
sum  of  ready  money,  by  having  the  half  of  sums  already 

'  "  Lass  und  Zahn,"  p.  229. 


428  YALE  READINGS  IN   INSURANCE 

paid  refunded  to  them."  Even  where  the  burden  of  poor 
relief  has  been  diminished,  it  has  not  always  fallen  to  an 
extent  equal  to  the  cost  of  insurance  to  the  employers  alone. 
Thus  in  the  city  of  Konigsberg,  in  spite  of  an  increase 
of  20,000  in  the  population  during  four  years,  the  expendi- 
ture on  poor  relief  actually  diminished,  but,  while  they 
did  not  claim  to  have  made  a  saving  on  this  score  of  more 
than  130,000  marks,  employers  paid  in  1896-1897  about 
380,000  marks,  or  nearly  three  times  this  amount,  as  their 
share  of  the  burdens  of  insurance.* 

While  insurance  provides  for  indemnity  only,  it  does  not 
accomplish  its  social  purpose,  unless  at  the  same  time  it 
leads  to  a  restriction  of  the  contingencies  which  give  rise 
to  the  indemnity.  Thus  protection  against  fire  has  gone 
hand  in  hand  with  fire  insurance,  and  the  mere  fact  that 
in  insurance  pure  and  simple  the  premiums  are  graded 
according  to  the  risk  puts  a  certain  penalty  upon  the  en- 
couragement of  risk.  It  is  for  the  interest  of  the  insured 
as  a  body  to  keep  down  casualties,  even  though  an  indi- 
vidual may  think  that  he  can  profit  by  them.  It  is,  there- 
fore, somewhat  surprising  to  learn  that,  since  the  sick 
insurance  laws  have  gone  into  effect,  there  has  been  a 
steady  increase  in  the  cost  of  sickness  per  member,  in 
the  expenditure  for  each  case  of  sickness,  and  also  in  the 
expenditure  for  each  day  of  sickness,  as  shown  by  the 
following  table: 

'  "Lass  und  Zahn,"  p.  23L  An  elaborate  plea  for  the  contention  that 
workingmen's  insurance  has  relieved  the  burden  of  pauperism  in  Ger- 
many is  contained  in  two  articles  by  David  Griinsprecht  under  the 
title:  "Die  Entlastung  der  offentlichen  Armenpflege  durch  die  Arbeiter- 
versicherung,"  (Conrad's  "  Jahrbiicher,"  1907,  pages  63-88  and  364- 
378).  The  author  concedes,  however,  at  the  outset  that  the  expenses 
of  poor-relief  are  almost  everywhere  steadily  rising. 


WORKINGMEN'S  INSURANCE  IN   GERMANY       429 

Cost  of  Sickness^ 


Year 


1885  .. 

1886  .. 

1887  . . 

1888  . . 

1889  .. 

1890  . . 

1891  .. 

1892  . . 

1893  .  . 

1894  . . 

1895  .. 

1896  . . 

1897  . . 

1898  .  . 

1899  .. 

1900  .  . 

1901  .. 

1902  .. 

1903  . . 

1904  .. 

1905  .. 

1906  .  . 

1907  .. 


Marks 


47,400 

53,041 

55,202 

61,561 

70,975 

84,040 

89,166 

94,258 

101,971 

99,588 

104,822 

109,722 

120,487 

128,057 

145,324 

157,865 

163,355 

167,801 

180,841 

213,931 

232,243 

241,793 

273,887 


,121 
,099 
,067 
,484 
,191 
,014 
,091 
373 
,698 
,457 
,366 
,779 
,910 
,300 
,200 
,200 
,600 
,400 
,700 
,500 
,900 
,600 
,500 


Per 

Member 


11.40 
11.55 
12.77 
12.96 
13.55 
14.35 
13.67 
13.93 
13.81 
14.45 
14.60 
15.87 
16.58 
16.94 
17.02 
17.69 
19.97 
20.76 
20.68 
22.56 


For  each 
Case  of 
Sickness 


26.41 
30.99 
31.78 
34.93 
34.76 
34.69 
37.19 
38.03 
36.50 
39.96 
38.77 
39.70 
40.64 
42.68 
42  74 
43.01 
45.25 
47.00 
47.84 
50.64 
52.16 
54.70 
55.35 


For  each 

Day  of 

Sickness 


1.88 
2.02 
2.04 
2.08 
2.12 
2.15 
2.19 
2.20 
2.21 
2.28 
2.26 
2.30 
2.34 
2.40 
2.40 
2.43 
2.45 
2.49 
2.52 
2.56 
2.63 
2.76 
2.81 


Not  only  has  the  expenditure  for  sickness  increased,  but 
also  the  number  of  cases  of  sickness  in  proportion  to  the 
insured,  the  number  of  days  of  sickness  in  proportion  to 
the  insured,  and  the  number  of  days  of  sickness  in  propor- 
tion to  each  case  of  sickness.  On  the  other  hand,  the 
number  of  deaths  has  fallen  in  proportion  to  the  number 
insured,  as  is  shown  by  the  following  table  :^ 

'This  table  is  taken  down  to  1897  from  "Lass  und  Zahn,"  p.  144. 
The  figures  for  the  later  years  are  compiled  and  computed  from  "Statis- 
tik  des  Deutschen  Reichs,"  Vols.  CLVI  and  CXCIV. 

2 This  table  is  taken  down  to  1897  from  "Lass  und  Zahn,"  p.  139. 
The  figures  for  the  later  years  are  compiled  from  "Statistik  des  Deut- 
schen Reichs,"  Vols.  CLVI  and  CXCIV. 


430 


YALE  READINGS  IN  INSURANCE 


Cases  of  Sickness 

Days  of  Sickness 

Deaths 

Absolutely 

Per 
100  in- 
sured 

Absolutely 

Per 
100  in- 
sured 

Per 
case  of 
sick- 
ness 

Ab- 
solutely 

Per 
100  in- 
sured 

1888  . . . 

1,762,520 

32.6 

29,528,770 

547.0 

16.8 

44,500 

0.96 

1889  .  . . 

2,042,082 

33.2 

33,428,682 

544.1 

16.4 

48,388 

0.95 

1890  .  . . 

2,422,350 

36.8 

39,176,689 

595.4 

16.2 

54,287 

0.99 

1891  . . . 

2,397,826 

34.9 

40,798,620 

593.0 

17.0 

54,002 

0.95 

1892  . . . 

2,478,237 

35.6 

42,756,026 

614.7 

17.3 

56,413 

0.98 

1893  .  . . 

2,794,027 

39.3 

46,199,436 

650.1 

16.5 

57,295 

0.98 

1894  . . . 

2,492,309 

34.2 

43,686,440 

599.9 

17.5 

54,343 

0.90 

1895  .  . . 

2,703,632 

35.9 

46,470,023 

617.5 

17.2 

55,314 

0.89 

1896  . . . 

2,763,757 

34.8 

47,608,226 

599.2 

17.2 

57,000 

0.86 

1897  .  . . 

2,964,937 

35.6 

51,513,783 

617.9 

17.4 

59,432 

0.85 

1898  . . . 

3,002,593 

34.2 

53,201,173 

606.6 

17.7 

60,334 

0.82 

1899  . . . 

3,476,067 

38.0 

60,406,683 

659.8 

17.4 

67,550 

0.87 

1900  .  .  . 

3,679,285 

38.6 

64,916,827 

681.8 

17.6 

71,349 

0.88 

1901  .  .  . 

3,617,022 

37.5 

66,652,488 

691.3 

18.4 

67,889 

0.83 

1902  .  .  . 

3,578,410 

,36.3 

67,377,057 

683.5 

18.8 

68,624 

0.82 

1903  .  .  . 

3,782,620 

37.0 

71,726,598 

701.5 

19.0 

69,785 

0.80 

1901  .  .  . 

4,229,177 

39.5 

83,259,967 

777.4 

19.7 

73,211 

0.80 

1905  .  . . 

4,451,448 

39.8 

88,082,296 

787.5 

19.8 

77,965 

0.81 

1906  .  .  . 

4,423,756 

37.8 

87,444,605 

748.1 

19.8 

77,237 

0.76 

1907  . . . 

4,956,388 

40.8 

97,148,780 

800.3 

19.6 

82,486 

0.78 

Curiously  enough,  a  somewhat  smiilar  phenomenon 
shows  itself  in  the  case  of  accidents.  Not  only  has  the 
number  of  accidents  indemnified  increased  absolutely,  but 
it  has  increased  in  proportion  to  the  number  of  those 
insured. 

"Fortunately,"  says  the  report,  "not  the  more  serious 
accidents  which  result  in  death  or  complete  inability  to 
work  make  up  the  increase  in  the  frequency  of  accidents. 
On  the  contrary  these  show  a  digressive  tendency  .  .  . 
only  the  lighter  accidents,  that  is  those  with  partial  con- 
tinuing, and  particularly  those  with  a  temporary,  inability 
to  work  have  increased."  These  facts  are  shown  in  the 
following  table: 


WORKINGMEN'S  INSURANCE  IN  GERMANY      431 

Number  of  Injured  Persons  for  Whom  Indemnities  Have  Been 
Granted  for  the  First  Time  in  All  Kinds  of  Accident 
Insurance ' 


Absolute  Figures 


Per  1,000  Insured 


1888 
1889 
1890 
1891 
1892 
1893 
1894 
1895 
1896 
1897 
1898 
1899 
1900 
1901 
1902 
1903 
1904 
1905 
1906 


In  All 


21,057 
31,019 
41,420 
50,507 
54,827 
61,874 
08,677 
74,467 
85,272 
91,171 
96,774 
104,811 
106,447 
116,089 
119,901 
127,947 
136,126 
139,787 
138,283 


Consequences  of  the  Injury 


Death 


Permanent 
Incapacity 
of  Support 


Com- 
plete 


3,645 
5,185 
5,958 
6,346 
5,811 
6,245 
6,250 
6,335 
6,989 
7,287 
7,848 
7,999 
8,449 
8,359 
7,842 
8,236 
8,552 
8,757 
8,970 


2,203 
2,882 
2,681 
2,561 
2,640 
2,487 
1,752 
1,668 
1,524 
1,452 
1,109 
1,297 
1,366 
1,416 
1,396 
1,517 
1,578 
1,476 
1,454 


Partial 


Tem- 
porary 
incapac- 
ity 


In  All 


11,023 

16,337 
22,615 
27,788 
30,569 
36,236 
38,952 
40,527 
44,373 
46,489 
47,764 
51,240 
51,111 
54,340 
55,264 
58,129 
62,563 
63,530 
60,814 


4,186 
6,615 
10,166 
13,812 
15,807 
16,906 
21,723 
25,937 
32,386 
35,943 
40,053 
44,275 
45,521 
51,974 
55,399 
60,065 
63,433 
66,024 
67,045 


2.03 
2.32 
3.03 
2.80 
3.04 
3.41 
3.78 
4.05 
4.84 
5.08 
5.30 
5.63 
5.63 
6.15 
6.28 
6.57 
6.85 
6.91 
6.67 


Consequences  of  the  Injury 


Permanent 
Incapacity 
of  Support 


Com- 
plete 


Partial 


Tem- 
porary 
inca- 
pacity 


0.35 
0.39 
0.44 
0.35 
0.32 
0.34 
0.34 
0.35 
0.39 
0.41 
0.43 
0.43 
0.45 
0.44 
0.41 
0.42 
0.43 
0.43 
0.43 


0.21 

1.07 

0.22 

1.22 

0.20 

1.65 

0.14 

1.54 

0.15 

1.69 

0.14 

2.00 

0.10 

2.14 

0.09 

2.20 

0.09 

2.52 

0.08 

2.59 

0.06 

2.62 

0.07 

2.75 

0.07 

2.70 

0.08 

2.88 

0.07 

2.90 

0.08 

2.99 

0.08 

3.15 

0.08 

3.14 

0.07 

2.93 

0.40 
0.49 
0.74 
0.77 
0.88 
0.93 
1.20 
1.41 
1.84 
2.00 
2.19 
2.38 
2.41 
2.75 
2.90 
3.08 
3.19 
3.26 
3.24 


This  is  a  curious  phenomenon.  The  official  report  says, 
"  From  what  has  been  said  there  is  no  ground  for  the  claim 
that  obligatory  accident  insurance  itself  leads  to  an  in- 
crease of  accidents,  in  that  it  makes  the  workingmen  care- 
less and  employers  indifferent.  That  any  one  should  now, 
having  regard  to  the  existing  insurance,  expose  himself 
more  frivolously  to  an  accident;  that  he  should  allow  a 
finger  to  be  cut  off,  or  allow  his  leg  to  be  crushed,  is  in  con- 
tradiction, as  Boediker  well  remarks,  to  the  instinct  of 
self-preservation.  The  fear  of  pain,  the  uncertainty  of 
the  result,  which  may  be  deadly,  operate  upon  the  mind 
more  than  the  prospect  of  getting  an  allowance  which  at 


'  "Statistisches  Jahrbuch  fiir  das  Deutschen  Reich,"  1908,  p.  312. 


432  YALE  READINGS  IN  INSURANCE 

the  most  may  be  equal  to  two-thirds  of  the  forfeited  earn- 
ings. Accidents  which  are  brought  about  intentionally  are 
in  any  case  not  indemnified,"^ 

This  a  priori  reasoning  is  a  plausible  answer  to  the  claim 
that  men  deliberately  injure  themselves  to  get  an  indem- 
nity, but  cases  are  not  unknown  in  which  people  have 
acted  in  what  seems  to  be  an  irrational  manner,  and  it 
still  remains  necessary  to  explain  why  minor  accidents 
should  have  increased  in  spite  of  the  very  great  efforts 
made  by  employers  to  introduce  safety  appliances  and  pre- 
vent injuries.  A  number  of  reasons  are,  therefore,  given 
for  this  increase : 

(1)  It  is  said  that  they  are  more  strictly  reported,  which 
may  well  have  been  the  case  ten  years  ago,  but  it  is  hardly 
probable  that  an  increasing  accuracy  in  reporting  accidents 
should  continue  through  twenty  years. 

(2)  The  increase  in  the  use  of  machinery  and  the  con- 
centration of  workingmen  in  large  establishments  is  given 
as  a  reason,  but  this  argument  seems  to  be  weakened  by 
the  fact  that  the  increase  in  the  frequency  of  accidents  is 
more  noticeable  in  agriculture,  where  the  Germans  use 
much  less  machinery,  than  in  industry,  for  while  the  indus- 
trial accidents  indemnified  increased  378  per  cent,  in 
eighteen  years,  accidents  in  agriculture  increased  492  per 
cent,  in  sixteen  years.^  Moreover,  it  is  remarkable  that, 
if  the  different  occupations  are  ranked  according  to  the 
frequency  of  accidents,  those  which  involve  the  use  of 
comparatively  little  machinery  are  near  the  head,  while 
those  involving  much  machinery  are  at  the  foot.  Thus 
the  number  of  persons  indemnified  per  1000  persons 
injured  is  found  to  be  16.97  per  cent,  in  the  case  of  vehicle 
driving,  13.51  per  cent,  in  the  case  of  grist-mills,  11.94 
per  cent,  in  the  case  of  quarries,  while  in  railroads  it  is 
but  5.86  per  cent.,  in  metal  industries  4.21  per  cent.,  in 

1  "Lass  und  Zahn,"  p.  167. 

2  The  percentages  are  based  upon  the  figures  given  in  "  Statistisches 
Jahrbuch  fur  das  Deutsche  Reich,"  1908,  p.  312. 


WORKINGMEN'S  INSURANCE  IN  GERMANY      433 

textile  3.41  per  cent.^  The  claim  that  machinery  is  re- 
sponsible for  the  increase  in  accidents  would,  therefore, 
hardly  seem  to  hold  true. 

(3)  It  is  claimed  that  the  great  activity  of  trade  has 
required  the  appointment  of  less  experienced  men.  It  is 
impossible  to  control  this  statement  by  statistics,  but  some 
light  is  thrown  upon  it  by  the  figures  which  show  that  acci- 
dents are  much  less  frequent  in  proportion  among  the 
younger  men  than  among  the  middle  aged  and  elderly. 

It  appeared,  for  instance,  in  1897  that  the  number  of  the 
injured,  in  proportion  to  one  hundred  insured  in  each  class, 
varied  as  follows: 

Under  16 0.24        20-30 0.54        50-60 1.38 

16-18 0.32        30-40 0.92        60-70 1.42 

18-20 0.36        40-50 1.23        70  and  over  . . .  0.85 

It  is  not  shown  that  the  inexperienced  laborers  are  neces- 
sarily young,  but  this  is  not  an  unfair  assumption. 

(4)  The  increased  familiarity  of  the  men  with  the  law  is 
given  as  not  the  least  of  the  causes,  and  there  seems  every 
reason  to  consider  this  true.  In  other  words,  the  causes  of 
the  accidents  are  not  mainly  material  or  mechanical,  but  to 
a  large  extent  psychological. 

The  psychological  element  in  accidents  also  shows  itself 
in  the  distribution  of  accidents  according  to  the  day  of  the 
week  and  the  hour  of  the  day.  We  find  quite  universally 
that  Monday  furnishes  the  largest  number  of  accidents,  and 
Saturday  the  next  largest,  and  this  law  applies  both  to 
industry  and  to  agriculture.  An  interesting  table  bearing 
upon  the  same  subject  is  one  which  shows  an  increasing 
percentage  of  accidents  due  to  the  fault  of  the  industrial 
worker : 

>  Figures  quoted  in  "Lass  und  Zahn,"  p.  170,  also  in  the  "Report 
of  the  New  York  Bureau  of  Labor  for  1899,"  p.  769. 


434 


YALE  READINGS  IN   INSURANCE 


1887 


1897 


Fault  of  employer 

"      "  worker 

"      "  both  together 

"     "  fellow  workers,  or  third  person  . .  . 
Other  causes,  such  as  danger  of  occupation . 


20.47% 

17.30% 

26.56 

29.74 

4.61 

4.83 

3.40 

5.31 

44.96 

42.82 

One  is  tempted  to  contrast  the  German  figures  with  the 
results  of  the  operations  of  a  mutual  fire  insurance  com- 
pany in  which  the  beneficiaries  also  bear  the  losses,  and 
therefore  have  a  direct  motive  for  minimizing  them.  The 
Manufacturers'  Mutual  Fire  Insurance  Company  was  organ- 
ized in  1850.  It  was  for  many  years  under  the  manage- 
ment of  Edward  Atkinson,  as  president  and  treasurer. 
Being  mutual,  it  is  similar  to  the  accident  insurance  asso- 
ciations of  Germany,  in  that  those  who  pay  the  premiums 
also  have  to  bear  the  losses;  so  that  the  manufacturers  in 
this  company  are  interested,  as  the  German  manufact- 
urers are,  in  reducing  to  a  minimum  the  accidents  that 
cause  losses.  The  statistics,  running  over  half  a  century, 
are  very  instructive  regarding  the  effects  of  this  system, 
especially  if  we  take  the  figures  averaged  by  decades.  The 
single  years  show  considerable  variations,  as  might  be  ex- 
pected. The  report  issued  for  the  year  ending  December 
31,  1899,  gives  the  rate  of  loss  to  the  amount  written  per 
hundred  dollars,  as  follows: 

First  decade      1850-1859  —  0.3631 

Second  decade 1860-1869  —  0.2427 

Third  decade     1870-1879  —  0.2098 

Fourth  decade 1880-1889  —  0.1963 

Fifth  decade    1890-1899  —  0.1080 

It  is  difficult  to  escape  the  impression  that  the  number  of 
minor  accidents  has  increased  under  the  operation  of  the 
insurance  laws.  Whether  workmen  have  become  more 
careless,   or  whether  they  have  become  more  ready  to 


WORKINGMEN'S  INSURANCE  IN  GERMANY      435 

exaggerate  their  injuries,  the  effect  of  giving  them  under  the 
forms  of  insurance  an  indemnity  of  which  they  do  not  bear 
the  burden  seems  to  have  stimulated  an  irresponsibihty, 
which  all  the  efforts  of  the  employers  to  diminish  accidents 
have  not  yet  overcome. 

There  are  other  facts  which  indicate  similarly  a  relaxa- 
tion of  the  spirit  of  self-help.  The  deposits  in  the  savings 
banks,  while  they  show  an  increase,  show  a  diminishing 
rate  of  increase  of  the  smaller  deposits,  as  compared  with 
deposits  in  general. 


Deposits  and  Smj 

\LL  Depositors  in  Prussia 

Total 

Deposits 

1,000,000 

M. 

Increase 

Number 
Depositors 
Under  60  M. 

000 
Omitted 

Per 

Cent, 
of  all 
Depos- 
itors 

Increase 

.•\bsolute 

1,000,000 

M. 

Per 
cent. 

Absolute 

1000 
Depositors 

Per 
Cent. 

1880  . . . 
1885  .  . . 
1890  ... 
1895  . . . 

1900  .  .  . 

1901  ... 

1902  . .  . 

1,593 
.       2,261 

3,281 
.       4,345 

5,745 
.      6,236 

6,727 

668 

1,020 

1,064 

1,400 

491 

491 

41. 
45. 
32. 
32. 

8.5 
7.8 

725 
1,214 
1,609 
1,972 
2,421 
2,514 
2,624 

29.4 
28.9 
28.1 
28.0 
28.0 

489 
395 
363 
449 
93 
110 

69. 

32. 

22. 

22. 
3.8 
4.3 

Dr.  Barthelme,!  from  whose  book  the  foregoing  figures 
are  taken,  shows  that  in  Germany  the  savings  banks  are 
not  used  by  the  poorer  classes  as  much  as  they  should  be. 
He  therefore  advocates  a  special  system  of  premiums  on 
savings. 

It  was  stated  at  the  beginning,  as  one  of  the  chief  char- 
acteristics of  government  insurance,  that  the  premium  was 
turned  wholly  or  partly  into  a  tax  —  a  payment,  there- 
fore, not  borne  exclusively  by  the  beneficiary.  The  Ger- 
man experience  with  this  kind  of  insurance  seems  to  show 

'Dr.  Georg  Barthelme:  "Das  Deutschen,  insbesondere  das  Preus- 
sischo  Sparkassenwesen,"  pages  48  and  60. 


436  YALE  READINGS  IN   INSURANCE 

that  it  is  possible  with  a  highly  trained,  intelligent  admin- 
istration to  carry  through  a  scheme  which  will  compel 
provision  against  various  contingencies,  and  that  this  can 
be  done  without  checking  the  growth  of  industry  or  lower- 
ing wages.  The  great  danger  of  the  system  seems  to  lie  in 
its  effects  upon  the  beneficiaries  themselves.  Wlien  we 
find  that,  in  spite  of  measures  to  diminish  accidents,  and 
in  spite  of  a  diminution  in  the  more  serious  accidents, 
the  proportion  of  minor  accidents  is  steadily  increasing; 
when  we  find  that  in  spite  of  generally  improved  sanitary 
conditions  and  a  diminished  death-rate,  the  cases  of  sick- 
ness are  increasing  in  proportion  to  the  number  of  the 
insured,  and  that  the  average  duration  of  each  case  of 
sickness  is  lengthened,  the  conclusion  seems  inevitable 
that  the  working  classes  as  a  whole  are  taking  advantage 
of  the  insurance  benefits  to  make  more  of  their  accidents 
and  ailments  than  they  did  in  the  beginning.  If  such  a 
thing  is  possible  under  an  administration  which  is,  on  the 
whole,  very  strict  and  punctilious,  we  naturally  ask,  what 
would  it  be,  if  the  government  officials  were  lax,  or  corrupt, 
or  subject  to  political  influence?  In  other  words,  the 
indications  are  that  unsuspected  and  rather  insidious 
evils  have  developed  under  the  system,  which  must  be 
taken  account  of  by  any  country  which  aims  to  copy  it. 
As  in  all  legal  measures,  we  must  weigh,  not  only  the 
mechanical  operations  of  the  laws,  but  also  their  effect  on 
the  mind  and  character  of  those  to  whom  they  apply. 


INDEX 


Accident  insurance,  by  French  gov- 
ernment, 399;  reasons  for  es- 
tablishing state  insurance  in 
Germany,  403-404;  organiza- 
tion of   in   Germany,   406-408. 

Accidents,  number  of  in  the  United 
States,  378-379;  prevention  of 
in  Germany,  418-419;  increase 
in  number  of  under  German 
insurance  law,  431-435. 

Adjustment  of  losses,  in  steam 
boiler  insurance,  366-367;  in 
marine  insurance,  350-3.51 ;  or- 
ganization for  bettering  in  fire 
insurance,  38-39. 

Aetna  Insurance  Company,  early 
history  of,  20-21;  establish- 
ment of  agency  system  by,  29. 

Agency  system  in  fire  insurance, 
early  history  of,  19;  develop- 
ment of,  28-30;  organization  of, 
75-77,   209-211. 

Albany  Fire  Insurance  Company, 
organization  of,  16. 

Anti-co-insurance  laws,  reasons  for, 
195;  results  of,  197-198. 

Anti-compact  law.s,  general  consid- 
eration of,  220-223;  reasons  for 
enactment  of,  220-222;  evil 
results  of,  94;  objections  to  in 
liability  insurance,  385. 

Assessments,  power  to  levy  in  fac- 
tory mutual  insurance  com- 
panies, 271-272. 

Assured,  duties  of  in  case  of  fire, 
176. 

Atkinson,  Edward,  quoted  in  regard 
to   factory   mutuals,   69;   .selec- 
tion   from    on    factory    mutual 
fire  insurance,  271-293. 
Austria,  state  insurance  in,  410. 
Automatic   sprinklers,    first   use   of, 


36-37;  general  consideration  of, 
263-270;  adoption  of  by  factory 
mutual  companies,  276 ;  method 
of  installing,  263-265;  cost  of 
installing,  267,  280-281;  life  of, 
270. 
Average,  meaning  of  in  fire  insur- 
ance, 177;  in  marine  insurance, 
339-340. 


B 


Barbon,  Nicholas,  originator  of  first 
fire  insurance  company,  3-4. 

Barratry,  definition  of,  334. 

Basis  rate,  definition  of,  106-107; 
under  Dean  schedule,  108-109. 

Bates,  William  W.,  quoted  in  regard 
to  marine  insurance,  295-296, 
320. 

Belgium,  state  insurance  in,  410. 

Bissell,  Richard  M.,  selection  from 
on  history  of  fire  insurance  in 
Europe,  1-11;  on  organiza- 
tion of  fire  insurance  com- 
panies, 63-81 ;  on  rates  and 
hazards,  82-114;  on  policy  con- 
tracts, 164-187. 

Blackstone,  quotation  from  in  re- 
gard to  law  of  negligence,  370- 
371. 

Boiler  insurance,  purpose  of,  353. 

Boston  Manufacturers'  Mutual  Fire 
Insurance  Company,  growth  of, 
271 ;  loss  record  of,  434. 

Bottomry  loans,  definition  of,  296; 
practice  of,  296-297. 

Broker,  work  of  in  fire  insurance, 
80-81 ;  result  of  on  city  insur- 
ance rates,  210-211. 

Burial,  provision  for  under  German 
accident  insurance,  407, 


437 


438 


INDEX 


California,  marine  insurance  in, 
327-329. 

Cities,  fire  rates  in,  209-210;  study 
of  fire  hazards  in,  260;  exten- 
sion of  methods  of  factory 
mutuals  in,  293. 

Civil  War,  marine  insurance  losses 
due  to,  316-318,  343. 

Classification,  origin  of  in  fire  in- 
surance, 22-23,  97-98,  202- 
203;  development  of  in  fire 
insurance,  139;  general  consid- 
eration of  necessity  of,  127- 
135;  necessity  of  broad  basis 
for  fire-rating,  143-145;  neces- 
sity of  cooperation  among  the 
companies,  130-135;  use  of  in 
determining  rates,  117;  ex- 
pense of  each  company  keep- 
ing, 130-131;  cost  of  securing 
proper,  155. 

Code  Napoleon,  result  on  fire  loss, 
256-257. 

Co-insurance,  general  consideration 
of,  188-198;  necessity  of  pro- 
viding for,  98-99,  180-183, 
193-198;  treatment  of  in  Uni- 
versal Mercantile  Schedule,  107 ; 
lower  rate  given  for  use  of, 
100;  clause  given,  182;  old 
French  clause,  188;  German, 
188;  New  York,  189;  illustra- 
tion of  fairness  of,  189-191; 
use  of  clause  in  Europe,  194- 
195;  reasons  for  opposition  to 
use  of  clause,  195-196. 

Collision,  clauses  regarding  in  marine 
insurance,  344—347. 

Commissions,  amount  paid  to  local 
fire  insurance  agents,  77,  212; 
necessity  for  tariff  commis- 
sions in  fire  insurance,  216-217; 
in  liability  insurance,  381-382. 

Compacts,  purpose  of  fire  insurance 
unions,  215-223. 

Competition,  conditions  in  fire  in- 
surance resulting  from  free, 
222-223;  in  marine  insurance, 
314. 

Compulsory  insurance,  efTect  of  in 
increasing    accidents,    431-435. 

Concurrent  fire  insurance  policies, 
definition  of,  186. 


Conflagrations,  effect  of  Chicago  and 
Boston,  33-34;  of  New  York,  22, 
203;  treatment  of  hazard  of, 
145-146;  as  they  complicate 
the  rating  situation,  202,  210; 
treatment  of  by  fire  insurance 
companies,  241-249;  absence  of 
in  factory  mvitual  system,  277- 
289;  rate  necessary  to  cover, 
248-249. 

Connecticut,  early  insurance  in,  17. 

Construction,  improvement  in,  257. 

Constructive  total  loss,  meaning  of, 
347-348. 

Cooperation,  needed  in  getting 
experience  of  fire  loss,  130— 
135;  purposes  of  among  fire 
insurance  companies,  215; 
among  fire  insurance  com- 
panies, 215-223;  situation  in 
Europe  in  regard  to,  223;  and 
anti-compact  laws,  220-223; 
reasons  for  not  better  among 
insurance  companies,  94;  be- 
ginnings of  among  local  agents, 
33-34;  early  attempts  at,  26- 
27;  among  liability  companies, 
377-378. 

Cost  of  insurance,  items  entering 
into,  48-49,  54-55. 

Cotton-mills,  imjiroved  construc- 
tion of,  258-259. 


D 


Daily  report,  first  use  of,  31;  pur- 
pose of,  77. 

Dawson,  Miles  M.,  selection  from 
on  scientific  fire-rating,  136- 
155. 

Dean,  A.  F.,  selection  from  on 
fire-rating,  115-135;  on  co- 
insurance, 193-198;  on  valued- 
policy  laws,  224-230;  originator 
of  Dean  schedule,  37,  108. 

Discrimination,  kinds  of  in  fire 
insurance  rating,  207;  in  rates 
between  specific  risks,  211— 
213;  in  fire  insurance  rating, 
general  treatment  of,  199-214; 
results  of,  199;  in  marine  insur- 
ance and  its  effects  on  Amer- 
ican shipping,  319-320. 

Distribution    average    clause,    pro- 


INDEX 


439 


visions  of,  185-186;  illustration 

of,  192-193. 
Dividend   policy,    of   American    fire 

insurance     companies,     29-30; 

of    English    marine    insurance 

companies,  322-324. 
Dwellings,  high  rates  on,  207. 


E 


Eagle  Fire  Insurance  Company  of 
New  York,  organization  of,  16. 

Earthquakes,  fire  insurance  com- 
panies' liability  for  damage 
resulting  from,   174. 

Economists,  effect  on  workingmen's 
insurance  in  Germany,  402- 
403. 

Electricity,  hazards  of  use  of,  86. 

Elevator  insurance,  definition  of, 
376. 

Emery,  H.  C,  quoted  in  footnote, 
60. 

Employees,  law  of  liability  of  em- 
ployers to,  369-375. 

Employers'  liability,  moral  effects 
of  increasing,  431-435;  effect 
of  German  law  on  industrial 
peace,  421-424;  laws  in  Great 
Britain,  France,  Russia,  and 
Sweden,  410;  results  of  fail- 
ure of  laws  regarding  in  Ger- 
many, 403-404. 

Employers'  liability  insurance,  gen- 
eral consideration  of,  369-391 ; 
function  of,  372-373;  organiza- 
tion of  accident  insurance  in 
Germany,  406-408. 

England,  history  of  fire  insurance 
in,  1-7;  fire  rates  in,  202; 
marine  insurance  in,  298-307; 
old  age  insurance  in,  398. 

Examiners,  function  of  in  fire  in- 
surance, 77-78. 

Expense,  in  insurance  generally, 
48-49;  division  of  in  fire  insur- 
ance, 212;  elements  of,  60-61; 
in  boiler  insurance,  353-354; 
of  workingmen's  insurance  in 
Germany,  416;  in  liability  in- 
surance, 381-384. 

Expense  ratio,  definition  of,  120. 

Explosions,  statistics  of  steam 
boilers,  352. 


Exposure,  as  a  cause  of  fire  lo.ss, 
83-84;  treatment  of,  100-101, 
103-104,  112-114;  best  means 
of  lessening,  256-257. 

Evans,  President,  quotation  from  in 
regard  to  co-insurance,  191- 
192. 


Factory  mutual  fire  insurance,  gen- 
eral consideration  of,  271-293; 
growth  of  companies,  70;  fac- 
tors unfavorable  to  extension  of, 
73 ;  work  of  companies  in  secur- 
ing better  construction,  280- 
281 ;  results  of,  70-72. 

Farm  business,  former  profitable- 
ness of  to  fire  insurance  com- 
panies, 226-227;  results  on  of 
valued-policy  laws,  229. 

Farnam,  H.  W.,  selection  from  on 
government  insurance,  392— 
412;  on  the  operation  of  work- 
ingmen's insurance  in  Germany, 
413-436. 

Feudalism,  negligence  law  during, 
370. 

Fire-doors,  tests  of,  255-256;  im- 
provement in  by  nautual  com- 
panies, 286. 

Fire-hose,  improvement  in  by  mu- 
tual companies,  286-287. 

Fire  insurance,  history  of  in  Europe, 
1-11;  in  the  United  States, 
12-39;  function  of,  41-62; 
effect  on  of  increasing  size  of 
companies,  47-48;  organization 
of  fire  insurance  companies, 
63-81;  cost  of,  44-47;  state  fire 
insurance,  396-397. 

"  Fire  Insurance  and  How  to  Build," 
quotation  from,   105-108. 

Fire  insurance  engineering,  general 
consideration  of,  250-262;  edu- 

^       cation  required  for,  250-251. 

Fire  patrols,  origin  of,    27. 

Fire  prevention,  reasons  for  slow 
adoption  of  devices  for,  214; 
cooperation  among  companies 
needed  to  secure  devices  for, 
219. 

Fire-proof  construction  in  Amer- 
ica, 199-200;  character  of  in 
Europe,  261. 


440 


INDEX 


Fire  protection  in  foreign  cities, 
261-262. 

Fire-rating,  general  consideration 
of,  115-135;  possibility  of  secur- 
ing scientific,   136-155. 

Fires,  causes  of,  83-90;  number  of 
in  the  United  States,  87,  261- 
262;  importance  of  investi- 
gating causes  of,  281-282;  re- 
sponsibility for  prevention  of, 
71. 

Fire  Underwriters'  Association  of 
the  Northwest,  function  of, 
35-36. 

Floating  policies,  definition  of  in 
fire  insurance,  186;  in  marine 
insurance,  344. 

Flour  mills,  diflSculty  in  rating, 
92-93. 

Foreign  fire  insurance  companies  in 
the  United  States,  21. 

France,  growth  of  fire  insurance  in, 
10;  old  age  insurance  in,  398. 

Fraud,  in  relation  to  fire  insurance 
policies,  172. 


G 


Gambaro,  Professor,  quotation  from 
on  marine  insurance,  303. 

General  average,  meaning  of  in 
marine  insurance,  339-340. 

General  fire  insurance  policies,  defi- 
nition of,  186. 

General  liability  insurance,  defini- 
tion of,  376. 

Germany,  history  of  fire  insurance 
in,  9-10;  origin  of  state  insur- 
ance in,  395-396;  history  of 
workingmen's  insurance  in, 
400-412;  sickness  insurance  in, 
404-406;  organization  of  acci- 
dent insurance  in,  406-408. 

Government  insurance,  general  con- 
sideration of,  392-412. 

Gow,  William,  quotation  from  in  re- 
gard to  marine  insurance,  296. 

Guilds,  fire  insurance  function  of, 
2.  9-10. 


Hail    insurance,    prevalence    of    in 
Europe,  397. 


Hand-in-Hand  Insurance  Com- 
pany, origin  of,  5. 

Harter  Act,  object  of,  338. 

Hartford  and  New  Haven  Insur- 
ance Company,  early  plans  of, 
17-18. 

Hartford  Fire  Insurance  Company, 
organization  of,   18-20. 

Hartford  Steam  Boiler  Inspection 
and  Insurance  Company,  sta- 
tistics of,  352;  inspections  by, 
363-364. 

Hazards,  general  consideration  of 
fire,  82-114;  kinds  of  fire, 
241-242;  division  of  fire 
hazards  into  classes,  82;  causes 
of  physical  hazards,  83-87; 
increase  in  voids  policy,  172- 
173;  special,  206;  conflagra- 
tion, 241-249;  improvement  in 
due  to  automatic  sprinklers, 
266-267;  difficulty  of  measur- 
ing in  liability  insurance,  378. 

Heald,  D.  A.,  selection  from  on 
valued-policy  laws,  230-235. 

Heating,  losses  due  to  defective 
apparatus  for,  85-86. 

Heubner,  Solomon,  selection  from 
on  history  of  marine  insurance, 
294-331. 

Hine,  C.  C,  quoted,  166-167. 

History  of  fire  insurance  in  Europe, 
1-11;  in  the  United  States,  12- 
39. 

House  plates,  early  use  of,  7-8. 

Howland  law,  effect  of  on  fire  loss, 
231-232. 

Hygiene,  effect  on  of  German  sick 
insurance,  419. 


Incendiarism,  causes  of,  88-91 ; 
methods  of  preventing,  219- 
220. 

Indemnity,  triie  measure  of,  236- 
237. 

Industry,  effect  of  German  insur- 
ance on,   416. 

Inspections,  character  of  for  fire 
insurance,  252-253;  cost  of, 
253;  purpose  of  bureaus  for, 
253-254;  results  of  bureau 
inspection,     218;     by     mutual 


INDEX 


441 


companies,  276;  of  steam 
boilers,  357-359;  number  of  in 
steam  boiler  insurance,  363- 
364;  character  of  in  boiler  in- 
surance, 364-366;  value  of, 
362-363. 

Insurable  interest,  in  fire  insurance, 
164-165;  necessity  of  having, 
344. 

Insurance,  definition  of,  42;  origin 
of,  137;  mutual  nature  of,  242; 
essential  nature  of,  60,  164, 
236;  function  of,  55-58,  393- 
394;  and  gambUng,  52-53; 
erroneous  conceptions  of,  50— 
53;  productivity  of,  58-60; 
place  in  economic  theory,  61- 
62;  cost  of,  60-61. 

Insurance  Company  of  North  Amer- 
ica, organization  of,  15;  estab- 
lishment of  agency  system  by, 
29;  early  history  of,  310-311; 
business  of  prior  to  1830,  311- 
312. 

Insurance  engineering,  plans  of, 
250-262. 

International  Mercantile  Marine 
Company,  self-insurance  by, 
330-331. 

Invalidity  insurance,  organization 
of  in  Germany,  408-410. 

Investments  of  German  state  in- 
surance reserves,  418. 

Iron-safe  clause,  provisions  of,  184- 
185. 


Jettison,  definition  of,  340. 
Judgment    rating,    plan    of    in    fire 

insurance,    96-97 ;    inadequacy 

of  system  of,  96-97. 


K 


Knickerbocker  Fire  Insurance  Com- 
pany, organization  of,  15-16. 


Lanterns,    losses   due   to   defective, 

281-282. 
Legal    regulation,    necessity    of    in 

fire  insurance,  245-246. 


Letters  of  mart  and  counter-mart, 
meaning  of,  333-334. 

Liability  insurance,  definition  of, 
375;  general  consideration  of, 
369-391;  history  of  in  United 
States,  375-376;  apparent  prof- 
itableness of,  387-388. 

Liability,  law  of  employers',  369- 
375;  amount  covered  by  boiler 
insurance,  361. 

Life  insurance,  one-sided  develoj)- 
ment  of,   139-141. 

Limited  liability,  necessity  of  in  fire 
insurance,  246. 

Line,  definition  of  as  used  in  insur- 
ance, 211;  amount  of  in  mutual 
insurance,  273-276. 

Litigation,  absence  of  in  fire  insur- 
ance, 178-179,  239;  increase  of 
in  liability  suits,  371-372;  in- 
crease of  due  to  liability  insur- 
ance, 386-387. 

Live  stock  insurance,  prevalence  of 
in  Europe,  397. 

Lloyds,  the  marine  corporation, 
history  of,  298-300;  import- 
ance of,  300-301 ;  organization 
of,  303-305;  publications  of, 
301-303;  discrimination  by  in 
favor  of  English  ships,  319- 
320. 

Lloyds  fire  insurance  companies, 
definition  of,  73;  plans  of,  73- 
74;  craze  for,  39. 

Lombards,  introduction  of  marine 
insurance  by,  332. 

London  Assurance  Corporation,  or- 
ganization of,  6-7. 

London  fire  of  1666,  influence  of  on 
fire  insurance,  3. 

London  Insurers,  an  early  insur- 
ance company,  5. 

Losses,  by  fire  in  the  United  States, 
199,  290-291;  in  various  coun- 
tries, 260-261;  amount  due  to 
various  causes,  83-87;  effect  on 
of  valued-policy  laws,  231-235; 
function  of  fire  insurance  com- 
panies in  reducing,  213; 
methods  of  reducing,  272,  291 ; 
decrease  in  duo  to  automatic 
sprinklers,  266-267;  decrease  in 
by  manufacturers'  mutuals, 
434;  mostly  partial,  98,  195- 
196;     amount     companies     are 


442 


INDEX 


liable  for,  164;  method  of 
handling  insurance  losses,  79; 
options  in  settling,  170-172; 
adjustment  of  by  mutual  com- 
panies, 279-280;  by  marine 
companies,  349-351;  by  boiler 
insurance  companies,  366-367; 
by  liability  insurance  com- 
panies, 385-386;  increase  in 
marine  losses  due  to  improper 
insurance  rating,  306-307. 
Loss  ratio,  definition  of,  120;  of 
various  companies,  129;  on 
dwellings,  131;  amount  of  in 
general,  212. 


M 


Maps,  origin  and  use  of  in  fire 
insurance,  32-33;  cost  of,  98. 

Marine  hospital  service  of  the 
United  States,  insurance  fea- 
tures of,  400. 

Marine  insurance,  early  practice  of 
in  the  United  States,  13-14, 
296-298;  in  New  England,  16- 
18;  history  of,  294-331;  policy 
contract  of,  332-351 ;  perils 
insured  against,  333;  complex 
nature  of,  294-295;  history  of 
in  England,  298-307;  as  car- 
ried on  by  Lloyds,  299-307;  in 
United  States,  307-331;  dur- 
ing Civil  War,  316-318;  ex- 
tent of  in  United  States, 
324-325;  decline  of  in  United 
States,  321-331;  combined  with 
fire  insurance,  325-326;  liabil- 
ity as  a  result  of  collisions, 
344-347. 

"Mary  Celeste,"  history  of  the  brig, 
341-342. 

Maryland,  state  scheme  of  accident 
insurance  in,  411. 

Massachusetts  Insurance  Report, 
selection  from  on  valued-policy 
laws,  235-240. 

Memorandum,  meaning  of  in  marine 
insurance,  335. 

Mercantile  risks,  rating  of,  101; 
rates  on,  208. 

Mercantile  Tarifif  and  Exposure 
Formula,  the  Dean  schedule, 
explanation  of,  108-114. 


Mill  construction,  plan  of,  280-281. 

Misrepresentation,  effect  of  in  ma- 
rine insurance,  336. 

Moore,  Francis  C,  selection  from 
on  co-insurance  clause,  188- 
198;  originator  of  schedule 
rating,  37,  104. 

Moore,  Frederick  C,  selection  from 
on  fire  insurance  engineering, 
250-262;  on  automatic  sprink- 
lers, 263-270. 

Moore,  W.  F.,  selection  from  on 
employers'  liability  insurance, 
369-391. 

Moral  hazard,  definition  of,  88 ;  causes 
of,  88-91 ;  reduction  of  by  mu- 
tual companies,  65,  280;  losses 
due  to  insurance  in  Germany, 
429-435;  in  marine  insurance, 
314. 

Mortgage  clause,  conditions  of,  179- 
180. 

Mortgagee,  how  provided  for  in  fire 
insurance  policy,  175-176. 

Mutual  Assurance  Company  of 
Norwich,  organization  of,  18. 

Mutual  fire  insurance,  early  origin 
of,  4;  effect  of  New  York  fire 
of  1835  in  starting,  24-25;  plans 
of  early  companies,  25;  num- 
ber of  companies,  63;  value 
of  local  companies,  65;  per- 
sistence of  town  companies, 
25-26;  laws  governing  town 
companies,  63-65;  failure  of 
state  mutuals,  67-69;  plans  of 
factory  mutuals,  70-72;  sys- 
tem of  factory  mutuals,  271- 
293;  loss  record  of  a  manufac- 
turers' mutual,  434. 


N 


Napoleonic  laws  regarding  fires,  11. 

National  Fire  Prevention  Associa- 
tion, purpose  and  plans  of,  254- 
255;  results  of  work,  37. 

Negligence  law,  evolution  of,  369- 
375. 

New  England,  early  insurance  in, 
16-21. 

New  Haven  Insurance  Company, 
plans  of,  17. 

New  York  standard    fire  insurance 


INDEX 


443 


policy,    printed    conditions    of, 
156-163. 
New  Zealand,  state  life  insurance  in, 
399-400. 


O 


Old-age  insurance,  in  England,  398; 

in    France,    398-399;    in    Ger- 
many, 408-410. 
Open  policy,  definition  of  in  marine 

insurance,  344. 
Ordinance  de  la  Marine,  importance 

of,  298. 
Over-insurance,  evil  effects  of,  49- 

50;    effect  on  of  valued-policy 

laws,  226. 
Oviatt,    F.    C,    selection    from    on 

history  of  fire  insurance  in  the 

United  States,  12-39. 


Packing  houses,  difficulty  in  rating, 
93. 

Paper  mills,  improvement  in  con- 
struction of,  287-288. 

Participating  fire  insurance,  possi- 
bilities of,  151. 

Particular  average,  meaning  of  in 
marine  insurance,  339-340. 

Peninsular  and  Oriental  Steamship 
Company,  self-insurance  by, 
331. 

Pensions,  amount  of  under  German 
system,  408-409;  in  Great  Brit- 
ain and  Australia,  410. 

Percentage  value  clause,  meaning 
of,  180-182. 

Perpetual  fire  insurance  policies, 
definition  of,  186-187. 

Philadelphia  Board  of  Fire  Under- 
writers, first  use  of  schedules, 
203. 

Philadelphia  Contributionship  for 
the  Insurance  of  Houses  from 
Loss  by  Fire,  history  of,  14-15. 

Phoenix  Insvn-ance  Company,  es- 
tablishment of  agents  on  Pacific 
Coast,  33. 

Plimsoll,  Samuel,  quoted  in  regard 
to  Lloyds,  305-306. 

Policies,  nature  of  fire  insurance, 
164-187;    early    forms    of,    6, 


26-27;  movement  for  standard, 
36,  167-169;  printed  conditions 
of  standard,  156-163;  options 
in  settling  losses,  170-172;  can- 
not be  altered,  178;  the  marine 
policy,  332-351. 

Poor  relief,  effect  on  of  German 
state  insurance,  424-428. 

Povey,  Charles,  originator  of  early 
fire   insurance  companies,   5-6. 

Preferred  risks,  reasons  for  exist- 
ence of,  207-208;  companies 
make  a  specialty  of,  209. 

Premiums,  method  of  determining 
in  liability  insurance,  380-381; 
rate  of  for  boiler  insurance, 
354-355. 

Prevention  of  fire,  cooperation 
among  companies  needed  for, 
219;  province  of  stock  com- 
panies in  regard  to,  69-70; 
effect  on  of  Code  Napoleon  in 
France,  11. 

Probability,  nature  of  mathematical 
law  of,  137-138. 

Profit,  amount  of  in  fire  insurance, 
212. 

Proof  of  loss,  use  in  marine  insur- 
ance, 349. 

Providence-Washington  Insurance 
Company,  organization  of,    16. 

Public  liability  insurance,  defini- 
tion of,  376. 


R 


Rates,  boiler  insurance,  354-355, 
367-368. 

Rates,  fire  insurance,  general  con- 
sideration of,  82-114;  difficulty 
in  making,  94-95,  118,  119; 
under  different  schedules,  121- 
123;  expediency  as  a  determi- 
nant of,  123-124;  empirical 
nature  of,  141-142;  advantages 
of  securing  scientific,  147-149; 
by  factory  mutual  companies, 
271;  reduction  in  due  to  better 
construction,  209,  258-259; 
kinds  of  discrimination  in,  207; 
effect  on  of  valued-policy  laws, 
225-226;  amount  necessary  to 
cover  conflagration  hazard, 
248-249. 


444 


INDEX 


Rates,  liability  insurance,  372-373, 
377-378. 

Rates,  marine  insurance,  312,  315; 
discrimination  in  marine  rates, 
318-320;  factors  determining 
marine  rates,  338. 

Rating,  fire,  general  consideration 
of,  115-135;  history  of,  95- 
114;  difficulties  involved  in, 
92-95;  effect  on  of  free  compe- 
tition, 34-35;  by  National 
Board  of  Fire  Underwriters, 
33-34;  origin  of  schedules  for, 
37;  schedule  rating,  99-114; 
Dean  schedule,  108-114;  by 
compacts,  215-216;  coopera- 
tion in,  215;  objections  to 
schedule,  107;  system  of  judg- 
ment rating  described,  95-97; 
incongruity  in,  121-123;  treat- 
ment of  exposure  hazards, 
112-114;  discrimination  and 
cooperation  in,  199-223;  oppo- 
sition to,  147;  necessity  of  hav- 
ing facts  for,  142-143;  way  to 
secure  scientific,  143-145;  prog- 
ress toward  scientific  fire-rating, 
202-205. 

Raven,  A.  A.,  selection  from  on 
marine  insurance  policy,  332- 
351. 

Register,  Lloyds,  description  of, 
301-303. 

Reserve,  in  fire  insurance,  deter- 
mination of,  243-244;  proper 
basis  for  computing,  149-150; 
early    laws    concerning,    23-24. 

Reserve,  in  liability  insurance,  384- 
385;  difficulty  of  determining 
proper,  387-390. 

Risk,  harmful  effects  of,  47-48; 
results  of  elimination,  50;  cost 
of  eliminating,  54-55;  produc- 
tive function  of  assuming, 
58-60;  prevention  of  in  boiler 
insurance,  353;  necessity  of 
limiting  amount  at  risk  in  con- 
flagration centers,  247. 

Risteen,  A.  D.,  selection  from  on 
steam  boiler  insurance,  352- 
368. 

Romans,  marine  insurance  among, 
296-297. 

Roofs,  fire  losses  due  to  faulty 
construction  of,  282-283. 


Royal    Exchange    Assurance    Com- 
pany, origin  of,  6-7. 


S 


Safety-fund  law  of  New  York, 
provisions  of,  146. 

Salaries,  amount  of  in  fire  insurance, 
212. 

Salvage,  meaning  of  in  marine 
insurance,  341-342. 

Schedule  rating,  description  of, 
99-114;  arguments  in  favor  of, 
101;  by  Universal  Mercantile 
Schedule,  104-108;  by  Dean 
schedule,  108-114;  as  a  scien- 
tific advance,  153;  development 
of,  203-205;  object  of,  204; 
value  of,  204-205;  still  judg- 
ment rating,  205-206. 

Self -insurance,  meaning  of,  41-42; 
relative  cost  of,  44-47;  by  big 
shipping  companies,  330-331. 

Shipping,  prosperity  of  American, 
15;  decline  of  American,  316- 
320. 

Sickness  insurance,  establishment 
of,  in  Germany,  404;  in 
Hungary,  Norway,  Sweden, 
Holland,  and  Iceland,  410; 
plans  of,  405-406;  greater 
amount  of  sickness  due  to  in- 
surance,  429-430. 

Socialism,  effect  of  on  German  state 
insurance,  401-402;  effect  of 
state  insurance  on  socialism, 
419-421. 

Special  agents,  in  fire  insurance, 
reasons  for  employing,  27-28; 
scope  of  work,  31-32,  35-36. 

Specific  policies  in  fire  insurance, 
definition,  of,  186;  reasons  for 
use  of,   196-197. 

Spontaneous  combustion,  as  a  cause 
of  fire,  84;  losses  due  to,  282- 
283;  in  bituminous  coal,  288. 

Standard  city,  use  of  in  fire  insur- 
ance rating,  106. 

Standard  fire  insurance  policy, 
printed  conditions  of,  156- 
163. 

State  insurance,  fire,  early  applica- 
tion of,  1-2;  attempt  of  City 
of  London  in  establishing,  3-4; 


INDEX 


445 


as  found  in  Europe,  10;  in 
Germany,  396. 

State  insurance,  general  considera- 
tion of,  392-411;  organization 
of  old-age  insurance  in  Ger- 
man j',  408-410;  of  accident 
insurance,  406-408;  of  sick- 
ness insurance,  404-406;  ad- 
vantages of  state  insurance, 
394;  political  effect  of  in  Ger- 
many, 419^21;  effect  of  on 
poor  relief,  424-428. 

State  supervision,  origin  of,  23; 
establishment  of  first  depart- 
ments for,  26. 

Statistics,  collection  of  by  mutual 
fire  insurance  companies,  276- 
277;  value  of  in  liability  insur- 
ance, 381. 

Steam  boiler  insurance,  general  con- 
sideration of,  352-368. 

Stock  fire  insurance  companies, 
organization  of,  74—81. 

Stores,  fire  hazards  of,  292-293; 
proper  con.struction  of,  293-294. 

Stranding,  meaning  of  in  marine 
insurance,  342. 

Strikes,  effect  on  of  German  insur- 
ance, 421-424. 

Sun  Fire  Insurance  Company,  early 
plans  of,  6. 

Surplus,  necessity  of  in  fire  insur- 
ance, 29-30,  55-56;  amount 
needed,  57-58  ;  real  nature  of 
in  fire  insurance,  243-244; 
advantages  of  having  large, 
322-324. 

Switzerland,  state  fire  insurance  in, 
396-397 ;  workingmen's  insur- 
ance in,  411. 


Taxes,  amount  of  in  fire  insurance, 
212. 

Teams  insurance,  definition  of,  376. 

Termination  of  policy,  methods  of, 
175. 

"The  Fire  Office,"  first  fire  insur- 
ance company,  3. 

Three-fourths  loss  clause,  provisions 
of,  183-184. 

Thrift,  effect  on  of  compulsory 
insurance,  435. 


Time  policy  in  marine  insurance, 
definition  of,  344. 

Town  mutual  fire  insurance  com- 
panies, laws  governing,  63-65; 
results  of  operations,  65-66. 

Trust,  impossibility  of  fire  insur- 
ance companies  forming,  221- 
222. 


U 


Underwriters'  agencies,  use  of,  39, 

Underwriters'  Laboratories,  the, 
purpose  of,  255-256. 

Underwriting,  method  of  at  Lloyds, 
305-306;  system  of  personal 
underwriting  in  the  United 
States,  308-309;  qualities 
needed  for  successful  marine 
underwriting,  338-339. 

United  States,  history  of  fire  insur- 
ance in,  12-39;  law  of  liability 
in,  373-374. 

Universal  Mercantile  Schedule,  de- 
scription of,  104-108;  method 
of  making,  205-206. 


Valued-policy  laws,  origin  of,  38; 
general  consideration  of,  224- 
240;  provisions  of  Texas  stat- 
ute, 224;  states  in  which  laws 
are  in  force,  225;  reasons  for 
laws,  226-229 ;  increase  in  losses 
due  to,  231-235;  summary  of 
objections  to,  240. 

Valued-policy,  use  of  in  marine  in- 
surance, 344. 

Voyage  policy,  definition  of  in 
marine  insurance,  343. 


W 

Wadsworth,  Jeremiah,  founder  of 
early  Connecticut  insurance, 
17-18. 

Wager  policy,    prohibition  of,   344. 

Wages,  effect  on  of  German  insur- 
ance, 416-417. 

War,  fire  insurance  companies  not 
liable  for  losses  caused  by, 
173;   treatment  of  risks   of  in 


446 


INDEX 


marine    insurance,    343;    effect 

of  War  of  1812  upon  American 

marine     insurance     companies, 

18. 
Warrantees,    in    marine     insurance 

policy,  336-337. 
Whitney,  A.  W.,  selection  from  on 

the  conflagration  hazard,  241- 

249. 
Willett,    Allan    H.,    selection    from 


on  function  of  fire  insurance, 
41-62. 

Willoughby,  W.  F.,  quotation  from 
in  regard  to  workingmen's  in- 
surance, 373-374. 

Workingmen's  insurance,  history 
of  in  Germany,  400-410;  in 
Switzerland,  411;  operation  of 
in  Germany,  413-436;  effect 
on  workingmen,  424-428. 


This  book  is  DUE  on  the  last  date  stamped  below 

Jul    2  6  1960 


JAN  2  9  1936 

APR 

2?  mi 

0X 

25  ^9^^ 

J 

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8     1950 

Mnv2  6A«^ 

*N  ^4  195B 
OCT  1 1 1956 
.^QV  2  6 1956 


OEC     81956 


AUG  S  6  I960 

JAW  1  0  1961 
JUL  1 9  1961 
AUG  14  1961 

MAR  2  4  1^ 

klt<q  mm 

%m  1  71964 


*t.*i>*'* 


()^j|^t9|%60 


4 


.  \9Sa 


Form  L-9-15m-7,'32 


DEC  2  7  WS 


FEB  1956  X)i 


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